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Conditional Asset Pricing in Emerging Stock Markets

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Author Info
Wolfgang Drobetz
Susanne Stürmer
Heinz Zimmermann
Abstract

Stock returns in emerging markets are to some extent predictable on the basis of selected instrument variables. We show that local information is more important than global information to capture emerging stock market returns. This is an indication for at least partial segmentation of emerging stock markets. Our empirical results further demonstrate that predictability can be explained by time-variation in economic risk premiums. Instead of testing a traditional beta pricing model, we test a fully conditional asset pricing model in a stochastic discount factor framework. Scaling the vector of returns incorporates conditioning information, and scaling the economic risk factors captures time-variation in risk premiums. This technique allows testing some conditional implications of stochastic discount factor models, estimating the fixed weights of scaled factors as if the model was unconditional.

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Article provided by Swiss Society of Economics and Statistics (SSES) in its journal Swiss Journal of Economics and Statistics.

Volume (Year): 138 (2002)
Issue (Month): IV (December)
Pages: 507-526
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Handle: RePEc:ses:arsjes:2002-iv-11

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Related research
Keywords: Asset pricing; stochastic discount factor; time-varying risk premium; emerging markets; predictability;

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Find related papers by JEL classification:
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-87, September. [Downloadable!] (restricted)
  2. Lars Peter Hansen & Ravi Jagannathan, 1990. "Implications of security market data for models of dynamic economies," Discussion Paper / Institute for Empirical Macroeconomics 29, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  3. Kasa, Kenneth, 1997. "Consumption-based versus production-based models of international equity markets," Journal of International Money and Finance, Elsevier, vol. 16(5), pages 653-680, September. [Downloadable!] (restricted)
  4. Harvey, Campbell R, 1995. "Predictable Risk and Returns in Emerging Markets," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 8(3), pages 773-816. [Downloadable!] (restricted)
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  5. Goetzmann, William N. & Jorion, Philippe, 1999. "Re-Emerging Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(01), pages 1-32, March. [Downloadable!]
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  6. Geert Bekaert & Campbell R. Harvey, 1994. "Time-Varying World Market Integration," NBER Working Papers 4843, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Ravi Jagannathan & Zhenyu Wang, 1996. "The conditional CAPM and the cross-section of expected returns," Staff Report 208, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  8. Geert Bekaert & Jun Liu, 1999. "Conditioning Information and Variance Bounds on Pricing Kernels," NBER Working Papers 6880, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Wayne E. Ferson & Ravi Jagannathan, 1996. "Econometric evaluation of asset pricing models," Staff Report 206, Federal Reserve Bank of Minneapolis. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Javed Iqbal & Robert Brooks & Don U.A. Galagedera, 2008. "Testing Conditional Asset Pricing Models: An Emerging Market Perspective," Monash Econometrics and Business Statistics Working Papers 3/08, Monash University, Department of Econometrics and Business Statistics. [Downloadable!]
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