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Global and local sources of risk in Eastern European emerging stock markets

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  • Fedorova, Elena

    ()
    (BOFIT)

  • Vaihekoski, Mika

    (BOFIT)

Abstract

We study a pricing model for global and local sources of risk in six Eastern European emerging stock markets. Utilizing GMM estimation and an unconditional asset-pricing framework with and without time-varying betas, we perform estimations based on monthly data from 1996 to 2007 for Poland, Czech Republic, Hungary, Bulgaria, Slovenia and Russia. Most of these markets display considerable segmentation; the aggregate emerging market risk, as opposed to global market risk, is the significant driver for their stock market returns. It also appears that currency risk is priced into stock prices. The difference between local and global interest rates can be used to model the time-variation in the betas for both sources of risk.

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Bibliographic Info

Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 27/2008.

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Length: 32 pages
Date of creation: 15 Dec 2008
Date of revision:
Handle: RePEc:hhs:bofitp:2008_027

Note: Fedorova, E. and Vaihekoski, M.: Global and Local Sources of Risk in Eastern European Emerging Stock Markets Published in: Finance a úvér – Czech Journal of Economics and Finance, 2009, vol. 59, no. 1, 2-19. http://journal.fsv.cuni.cz/mag/article/show/id/1149
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Web page: http://www.suomenpankki.fi/bofit_en/
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Keywords: market integration; segmentation; asset pricing; emerging markets; Eastern Europe country risk;

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References

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  1. Doukas, John & Hall, Patricia H. & Lang, Larry H. P., 1999. "The pricing of currency risk in Japan," Journal of Banking & Finance, Elsevier, vol. 23(1), pages 1-20, January.
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  5. Giorgio De Santis & Selahattin Imrohoroglu, 1994. "Stock returns and volatility in emerging financial markets," Discussion Paper / Institute for Empirical Macroeconomics 93, Federal Reserve Bank of Minneapolis.
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  8. Korajczyk, Robert A., 1995. "A measure of stock market integration for developed and emerging markets," Policy Research Working Paper Series 1482, The World Bank.
  9. Marco Del Negro & Robin Brooks, 2002. "International Stock Returns and Market Integration," IMF Working Papers 02/202, International Monetary Fund.
  10. King, Michael R. & Segal, Dan, 2008. "Market segmentation and equity valuation: Comparing Canada and the United States," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(3), pages 245-258, July.
  11. Wayne E. Ferson & Campbell R. Harvey, 1996. "Fundamental Determinants of National Equity Market Returns: A Perspective on Conditional Asset Pricing," NBER Working Papers 5860, National Bureau of Economic Research, Inc.
  12. Jorion, Philippe, 1991. "The Pricing of Exchange Rate Risk in the Stock Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(03), pages 363-376, September.
  13. Saleem, Kashif & Vaihekoski, Mika, 2008. "Pricing of global and local sources of risk in Russian stock market," Emerging Markets Review, Elsevier, vol. 9(1), pages 40-56, March.
  14. Antell, Jan & Vaihekoski, Mika, 2007. "International asset pricing models and currency risk: Evidence from Finland 1970-2004," Journal of Banking & Finance, Elsevier, vol. 31(9), pages 2571-2590, September.
  15. Errunza, Vihang & Losq, Etienne, 1985. " International Asset Pricing under Mild Segmentation: Theory and Test," Journal of Finance, American Finance Association, vol. 40(1), pages 105-24, March.
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Citations

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Cited by:
  1. Numan Ülkü, 2011. "Modeling Comovement among Emerging Stock Markets: The Case of Budapest and Istanbul," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 61(3), pages 277-304, July.
  2. Elena Fedorova & Kashif Saleem, 2010. "Volatility Spillovers between Stock and Currency Markets: Evidence from Emerging Eastern Europe," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 60(6), pages 519-533, December.
  3. Mohanty, Sunil & Nandha, Mohan & Bota, Gabor, 2010. "Oil shocks and stock returns: The case of the Central and Eastern European (CEE) oil and gas sectors," Emerging Markets Review, Elsevier, vol. 11(4), pages 358-372, December.
  4. Vit Posta, 2012. "Time-Varying Risk Premium in the Czech Capital Market: Did the Market Experience a Structural Shock in 2008–2009?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 62(5), pages 450-470, November.
  5. Fedorova, Elena, 2011. "Transfer of financial risk in emerging eastern European stock markets: A sectoral perspective," BOFIT Discussion Papers 24/2011, Bank of Finland, Institute for Economies in Transition.
  6. Saleem, Kashif & Vaihekoski, Mika, 2010. "Time-varying global and local sources of market and currency risks in Russian stock market," International Review of Economics & Finance, Elsevier, vol. 19(4), pages 686-697, October.
  7. Waszczuk, Antonina, 2013. "A risk-based explanation of return patterns—Evidence from the Polish stock market," Emerging Markets Review, Elsevier, vol. 15(C), pages 186-210.

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