Factor reversal in euro zone stock returns: evidence from the crisis period

Authors

Hsin-I Chou, La Trobe University
Jing Zhao, La Trobe University
Sandy Suardi, University of WollongongFollow

RIS ID

97734

Publication Details

Chou, H., Zhao, J. & Suardi, S. (2014). Factor reversal in euro zone stock returns: evidence from the crisis period. Journal of International Financial Markets, Institutions and Money, 33 28-55.

Abstract

The adoption of the euro led to a shift in importance from country to industry effects in euro zone stock returns. For the first time, this paper shows that country effects have regained importance in the recent spate of crises. This euro-wide factor reversal is driven by countries with poor economic fundamentals, comprising Portugal, Italy, Ireland, Greece, and Spain (PIIGS). The results imply that a more traditional country portfolio approach provides greater diversification benefits during crisis periods and the minimum-variance frontier of industry portfolios in PIIGS countries can be improved by adjusting country weights.