This paper uses style analysis to investigate whether Euro-zone equity returns are driven by country or industry effects over the 1990–2008 period. We find that before the introduction of the Euro, country effects dominate, while industry effects prevail after 1999. This reversal is driven mainly by the countries that were least integrated in the Economic and Monetary Union (EMU) and world markets in the early 1990s and for which the EMU convergence process led to rapid strengthening of linkages with the core Euro-zone. For markets with stronger economic linkages, industry effects dominate both before and after the introduction of the Euro.

One-period expected returns on futures contracts with different maturities differ because of risk premia in the spreads between futures and spot prices. We analyze the expected returns for futures contracts with different maturities using the information that is present in the current term structure of futures prices. A simple affine one-factor model that implies a constant covariance between the pricing kernel and the cost-of-carry cannot be rejected for heating oil and German Mark futures contracts. For gold and soybean futures, the risk premia depend on the slope of the current term structure of futures prices, while for live cattle futures, the evidence is mixed.

We present a simple model implying that futures risk premia depend on both own‐market and cross‐market hedging pressures. Empirical evidence from 20 futures markets, divided into four groups (financial, agricultural, mineral, and currency) indicates that, after controlling for systematic risk, both the futures own hedging pressure and cross‐hedging pressures from within the group significantly affect futures returns. These effects remain significant after controlling for a measure of price pressure. Finally, we show that hedging pressure also contains explanatory power for returns on the underlying asset, as predicted by the model.

We test whether hedging currency risk improves the performance of international stock portfolios.We show that an auxiliary regression provides a wealth of information about the optimal portfolio holdings for non-mean–variance investors, analogous to the information provided by the Jensen regression about optimal portfolio holdings for the mean–variance case. We find that static hedging with currency forwards does not lead to significant improvements in portfolio performance for a US-Dollar based stock portfolio from the G5 countries, whereas dynamic hedges that are conditional on the interest rate spread do. These conclusions hold for both mean–variance and power utility investors and show up both in-sample and out-of-sample. However, the optimal forward positions can differ significantly for both types of investors.

We propose regression‐based tests for mean‐variance spanning in the case where investors face market frictions such as short sales constraints and transaction costs. We test whether U.S. investors can extend their efficient set by investing in emerging markets when accounting for such frictions. For the period after the major liberalizations in the emerging markets, we find strong evidence for diversification benefits when market frictions are excluded, but this evidence disappears when investors face short sales constraints or small transaction costs. Although simulations suggest that there is a possible small‐sample bias, this bias appears to be too small to affect our conclusions.