Global factors and equity market valulations: Do country characteristics matter?

This paper examines the relationship between equity market valuations (dividendprice ratio) using a dynamic factor model. The factor model decomposes each country’s market valuation into a global, region-specific and country-specific component. We find that the amount of variation explained by the factors is related to economic development indicators. Specifically, the valuations in the most developed (emerging) countries are primarily driven by the global (local) component of valuation ratios.