The Equity Risk Premium: Empirical Evidence from Emerging Markets
AbstractThe analysis of the Equity Risk Premium (ERP) and the research efforts aimed at solving the Equity Premium Puzzle (Mehra and Prescott 1985), are still widely discussed in the economic and financial literature. The purpose of this paper is to show that differences in the ERP between developed and emerging markets lead to many empirical asset pricing issues. Using data from both markets, we first provide an ex-post simple time series analysis on the ERP. Compared to developed markets, and in line with existing literature, we find that emerging markets compensate investors with higher returns. We observe that the time varying nature of the ERP in emerging economies, relates mainly to economic cycles, shocks and other macro phenomena (i.e. global financial market integration). Basic statistics also show that during the last decade the ERP shrunk, especially in advanced economies. To improve investigations on the higher emerging marketsÕ equity premium, a standard global asset pricing model is adopted. On one hand, we mainly find that the one-factor model does not fully predict emerging marketsÕ equity premia. On the other hand, we discover that the inclusion of liquidity conditions and time-varying components provides reasonable explainations for the behaviour of equity premia in these ÒyoungÓ markets. Our final findings mainly suggests that global business cycle and financial integration process are crucial in determining the risk associated to emerging marketsÕ investments.
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Bibliographic InfoPaper provided by Dipartimento di Economia e Finanza, LUISS Guido Carli in its series Working Papers CASMEF with number 1201.
Date of creation: 2012
Date of revision:
Stock markets returns; equity premium puzzle; Equity risk premium.;
Find related papers by JEL classification:
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-02-08 (All new papers)
- NEP-CWA-2012-02-08 (Central & Western Asia)
- NEP-FMK-2012-02-08 (Financial Markets)
- NEP-IFN-2012-02-08 (International Finance)
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- Marcella Lucchetta & Michael Donadelli, 2012. "Emerging Stock Premia: Do Industries Matter?," Working Papers 2012_22, Department of Economics, University of Venice "Ca' Foscari".
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