Stock returns: which effect explains more the country effect or the sector effect?

This paper examines the country and sector effect in European stock returns. We use stocks from the Down Jones STOXX 600, covering 18 countries, 10 sectors and 1010 stocks from January 2002 until February 2008. We find for the equally weighted portfolio that the explanatory power of both effects is almost similar. For the value weighted portfolio, the sector effect clearly dominates the country effect. The difference between the equally weighted portfolio and the value weighted portfolio suggests that the sector effect is driven by the large capitalisation stocks. To analyse this we exclude the 100 largest companies from our data sample and repeat our research. We find that the sector effect decreases dramatically and that the country and sector do not differ much anymore.