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Structural change and asset pricing in emerging markets

  • Garcia, Rene
  • Ghysels, Eric

This paper documents the importance of testing for structural change in the context of emerging markets. Typically, asset pricing factor models for emerging markets are conditioned on world financial market factors such as world equity excess returns, risk and maturity spreads as well as other variables designed to capture world business cycle fluctuations. We show that for many countries, while we cannot reject the model according to one usual chi-square test for overidentifying restrictions, we reject it on the basis of structural change tests, especially when international factors are considered. Much better support and greater stability are found when a local CAPM is tested with size-ranked portfolios. Some evidence of a small-size effect persists for some countries. Dans cet article, nous montrons l'importance d'utiliser des tests de changement structurel dans le contexte des marchés boursiers en émergence. Les modèles de valorisation das actifs financiers utilisés dans ce contexte sont en général des modèles conditionnels à facteurs fondés sur des facteurs à caractère international tels les rendements excédentaires sur le marché mondial des actions, les écarts de taux captant la prime de risque et la prime de terme, ainsi que d'autres variables visant à mesurer les fluctuations du cycle économique mondial. Nous montrons que dans de nombreux pays, bien que nous ne puissions pas rejeter les modèles en fonction des tests de suridentification habituels de distribution chi-carré, nous les rejetons en fonction des tests de changement structurel, notamment lorsque nous utilisons des factuers internationaux. Nous trouvons des résultats beaucoup plus favorables aux modèles et une plus grande stabilité lorsque nous testons un CAPM local avec des portefeuilles ordonnés selon la taille. Un effet de taille persiste toutefois dans certains pays.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 17 (1998)
Issue (Month): 3 (June)
Pages: 455-473

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Handle: RePEc:eee:jimfin:v:17:y:1998:i:3:p:455-473
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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  1. Bekaert, Geert & Harvey, Campbell R, 1995. " Time-Varying World Market Integration," Journal of Finance, American Finance Association, vol. 50(2), pages 403-44, June.
  2. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July.
  3. Bekaert, Geert & Harvey, Campbell R., 1997. "Emerging equity market volatility," Journal of Financial Economics, Elsevier, vol. 43(1), pages 29-77, January.
  4. Ghysels, E. & Guay, A. & Hall, A., 1995. "Predictive Tests for Structural Change with Unknown Breakpoint," Cahiers de recherche 9524, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  5. Campbell R. Harvey, 1994. "Predictable Risk and Returns in Emerging Markets," NBER Working Papers 4621, National Bureau of Economic Research, Inc.
  6. Garcia, Rene & Bonomo, Marco, 2001. "Tests of conditional asset pricing models in the Brazilian stock market," Journal of International Money and Finance, Elsevier, vol. 20(1), pages 71-90, February.
  7. Hansen, Lars Peter & Jagannathan, Ravi, 1991. "Implications of Security Market Data for Models of Dynamic Economies," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 225-62, April.
  8. Ferson, Wayne E & Harvey, Campbell R, 1991. "The Variation of Economic Risk Premiums," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 385-415, April.
  9. Ferson, Wayne E & Korajczyk, Robert A, 1995. "Do Arbitrage Pricing Models Explain the Predictability of Stock Returns?," The Journal of Business, University of Chicago Press, vol. 68(3), pages 309-49, July.
  10. Dufour, J.M. & Ghysels, E. & Hall, A., 1992. "Generalized Predictive Tests and Structural Change Analysis in Econometrics," Cahiers de recherche 9223, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  11. Donald W.K. Andrews & Werner Ploberger, 1992. "Optimal Tests When a Nuisance Parameter Is Present Only Under the Alternative," Cowles Foundation Discussion Papers 1015, Cowles Foundation for Research in Economics, Yale University.
  12. Ghysels, Eric & Hall, Alastair, 1990. "Are consumption-based intertemporal capital asset pricing models structural?," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 121-139.
  13. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  14. Ghysels, E & Hall, A., 1988. "A Test For Structural Stability Of Euler Conditions Parameters Estimated Via The Generalized Methods Of Moments Estimators," Cahiers de recherche 8837, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  15. Harvey, Campbell R., 1989. "Time-varying conditional covariances in tests of asset pricing models," Journal of Financial Economics, Elsevier, vol. 24(2), pages 289-317.
  16. Harvey, Campbell R, 1991. " The World Price of Covariance Risk," Journal of Finance, American Finance Association, vol. 46(1), pages 111-57, March.
  17. Ferson, Wayne E & Harvey, Campbell R, 1993. "The Risk and Predictability of International Equity Returns," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 527-66.
  18. Buckberg, Elaine, 1995. "Emerging Stock Markets and International Asset Pricing," World Bank Economic Review, World Bank Group, vol. 9(1), pages 51-74, January.
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