correlationinstockreturnsovertimeisextensiveandcanbe
foundin FamaandFrench (E. F.Famaand K.R.French,
“Permanent and Temporary Componentsof Stock Prices,”
Journal of Political Economy 96 [1988]: 246–273). While
theyfindthattheone-yearcorrelationsarelow,thefive-year
serial correlations are strongly negative for all size classes.
15 TherawdataonTreasurybillrates,Treasurybondrates,
andstockreturnswasobtainedfromtheFederalReservedata
archives maintained by the Fed in St. Louis.
16 E.Dimson,P.March,andM.Staunton,Triumphofthe
Optimists(Princeton, NJ: Princeton University Press, 2002).
17 The process by which country ratings are obtained is
explained on the S&P web site at
http://www.ratings.standardandpoors.com/criteria/index.htm.
18 TheseyieldswereasofJanuary1,2005.Whilethisisa
marketrate andreflectsexpectations, countrybond spreads
areextremelyvolatileandcanshiftsignificantlyfromdayto
day. To counter this volatility, the default spread can be
normalizedbyaveragingthespreadovertimeorbyusingthe
averagedefaultspreadforallcountrieswiththesamerating
as Brazil in early 2005.
19 Both the U.S. and Brazilian standard deviations were
computed using weekly returns for two years from the
beginningof 2003 totheendof2004.Whileyoucoulduse
dailystandarddeviationstomakethesamejudgments,they
tend to have much more noise in them.