Diversity of Empirical Design - Review of Studies on the Cross-Section of Common Stocks

Abstract

International studies on the cross-section of returns diff er strongly in respect to the empirical design. In this paper I cover wide range of international papers to give an overview of methodological variations applied by researchers. Construction of stock characteristics and risk mimicking factors underlying the Capital Asset Pricing Model (CAPM) and three- and four-factor pricing models give authors much degrees of freedom resulting in a wide set of alternative measurement methodologies. Also statistical tests on both cross-section and time-series of returns show methodological differences that might be influential on results and inferences from the analysis. Increasing exploration of international data sets puts new challenges on empirical studies that emerge from market and data characteristics. As a consequence, original methodology applied for U.S. market requires adjustments depending on coverage and scope of the analysis. This paper provides the summary of proposed adjustments and might serve as a starting point for the analysis of international equity data.