APPENDIX
SMBw, HMLw, and
Construction of Global Risk
Factors
As we focus on both country and
industry effects, we do not compute
global factors as weighted averages of
country (see Fama and French [1998])
or industry factors. Instead, we com-
pute them regardless of countries or
industries.
For each month t from July of
year y 1 to June of year y, we rank
stocks based on size and book-to-
market ratio of June y 1 and their
previous performance between t 12
and t 1. We perform independent
sorts beginning in July 1990 to cre-ate
SMBw, HMLw, and WMLw. We use
50% break points for size, and 30%
and 70% break points for book-to-
market and prior performance.
Following Fama and French
[1993], we form six global value-weight
portfolios, S/L, S/M, S/H, B/L, B/M, and
B/H, as the intersection of size and
book-to-market groups. We fol-low the
same procedure for prior performance
as for book-to-market; that is we form
six global value-weight portfolios, S/L,
S/M, S/W, B/L, B/M, and B/W, as the
intersection of size and prior
performance groups.
WMLw are as follows: SMBw = [(S/L
B/L) + (S/M B/M) + (S/H
B/H)]/3, HMLw = [(S/H S/L) + (B/H
B/L)]/2, and
WMLw = [(S/W S/L) + (B/W
B/L)]/2.
Consequently, our methodology can
be compared directly to neither that of
Liew and Vassalou [2000], who use three
sequential sorts, nor to that of
Arshanapalli, Coggin, and Doukas [1998],
who use 70% and 30% break points for
SMB and con-struct HML by selecting the
highest book-to-price stocks until half of
the capitalization of each market is
accumulated.