WC Whiner

Foreign Stock Investing and Diversification (EEM, EFA)

Holy jeepers, I think he was regressing prices, not returns. Could you be a little more clear on what you mean by, "if you do factor analysis?" The only way I get .97 with daily numbers from Yahoo back to EEM inception is with price regression. Using returns (including VIX "returns"), I only get daily r-squareds around 0.7.

Foreign Stock Investing and Diversification (EEM, EFA)

Wow, that table didn't work.

Check out the R output at www.bignose.org/~wcw/GFDEMregression....

As I said, .97 it surely, surely ain't.

Foreign Stock Investing and Diversification (EEM, EFA)

All you need to know about his data set is found in the three letters "EEM". That fund started in May 2003. It is my distinct suspicion that as a result of the very short time frame, our intrepid analyst used daily price movements. Me, I am a fan of using monthly numbers (which tend to flatten out daily noise to a certain extent) and time periods as long as I can get, to maximize the market regimes I can analyze. 5/03-present includes precisely two regimes: a trending global equity upswing favoring emerging markets, and a trending global equity downswing hitting the same group the hardest. Of course his PCA has .97 explanatory power -- it just says very, very little.

Let me grab some slightly longer time frames and run a simple monthly regression. While non-US equity investing can never diversify away your systematic market risk, the idea that it is of little or no benefit does not pass the smell test. Lessee... scribble scribble..

OK, I can't get total returns on short notice. I can grab GFD's price indexes through my old university library. Here's an ordinary least-squares run of the S&P versus GFD's World-ex-US and Emerging Markets price indexes, for which I have concurrent returns from July 1920, so over a thousand months and many different market regimes:

> print(summary(lm(SPXpr ~ xUSpr + GFD.EMpr, data=emp)), digits=1)

Call:
lm(formula = SPXpr ~ xUSpr + GFD.EMpr, data = emp)

Residuals:
Min 1Q Median 3Q Max
-2e-01 -2e-02 -5e-04 3e-02 4e-01

Coefficients:
Estimate Std. Error t value Pr(>|t|)
(Intercept) 0.003 0.002 2 0.03 *
xUSpr 0.442 0.042 10

Adjusted r-squared here is 0.2. A little different than .97, don't you think?