On the Construction of Common Size, Value and Momentum Factors in International Stock Markets: A Guide with Applications

Demand is growing for a better understanding of how assets are priced in countries outside of the U.S.While financial data are available for many firms world-wide, it is important to have a reliable andreplicable method of constructing high-quality systematic risk factors from these data. This paper firstdocuments that appropriately screened data from Thomson Reuters Datastream and Thomson ReutersWorldscope can be used to replicate closely not only U.S. market returns and the correspondingmomentum risk factor (as existing work has suggested), but also the widely-used U.S. size and value riskfactors. We then build novel pan-European and country-specific momentum, size, and value risk factors.By comparing our pan-European market returns and risk factors with their counterparts in the U.S., wefind that they are astonishingly highly correlated. The factors we compute are made available to otherresearchers.