| Summary: | This thesis explores the returns of country exchange-traded funds (ETFs) with regime switching risk factors. Using the Bayesian information criterion, I select the model with six risk factors and three states among other models.The estimation results show that both the returns of country ETFs and their sensitivities to risk factors are highly regime dependent.Firstly, the U.S. size and value factors are significant in explaining all selected ETFs across regimes. More specifically, small capitalization is associated with lower returns for seven ETFs in some regimes. High book-to-market ratio generates higher returns for all ETFs in most regimes.
Secondly, the global stock market has a positive impact on all selected country ETFs. Thirdly, all ETFs returns are negatively correlated to market volatility in bull and bear markets. Fourthly, stronger U.S. dollar generates a higher return for US ETF and lower returns for other seven ETFs across regimes. Finally, the returns of Australia, Canada and UK ETFs, which invest heavily in materials, are positively affected by commodity prices while other ETF returns are negatively influenced by them across regimes.
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