Cash Flows and Discount Rates, Industry and Country Effects and Co-Movement in Stock Returns


  • We thank Nate Clinton for research assistance and Mark Carey and Dale Henderson for helpful comments. The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System.

* Corresponding author: Mail Stop 19, Federal Reserve Board, Washington, DC 20551; Phone: +1-202-452-2349; E-mail:


We apply the Campbell decomposition to industry-by-country, national, global industry, and world stock index returns using 1995–2003 data. World, global industry, and country factors are all important for each of the two key components of stock returns: news about future dividends and news about future discount rates. Furthermore, the world component of future discount rates is more important than the idiosyncratic component, while the reverse is true for news about future dividends. Our results are broadly consistent with co-movement in future discount rates arising from perceptions of common elements of risk in international equity markets.