Decomposing Differences in Portfolio Returns Between North America and Europe

Abstract

The paper decomposes differences in mean and a series of quantiles of portfolio returns between North America and Europe into Fama and French’s five factors. We show that the differences in risk premia on factors, especially on market and size factors, account for most of the differences and the differences in factor risks seem to play an insignificant role in aggregate. The results from Blinder-Oaxaca decomposition show that the differences in market and size factor risk premia explain 71.9% and 22.8% of the overall mean difference, respectively. We also show that the roles that the risk premia on market and size factors play vary at different levels of portfolio returns, implying the market and size factor risk premia vary at different levels of portfolio returns. Also, we find that the risks on some factors seem to vary at different levels of portfolio returns.

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