European Financial and Accounting Journal 2018, 13(1):41-60 | DOI: 10.18267/j.efaj.205

Cross-Section of Asset Returns: Emerging Markets and Market Integration

Tamara Ajrapetova
University of Economics in Prague, Faculty of Finance and Accounting, Department of Banking and Insurance, W. Churchill Sq. 4, 130 67 Prague, Czech Republic.

Asset pricing in its essence is a very controversial topic. Despite numerous research papers criticising traditional approaches, such as linear factor models, practitioners as well as academics repeatedly return to the milestone models such as the Capital Asset Pricing Model (CAPM), mainly due to their attractive simplicity. This article focuses on the risk-return relationship by comparing the power of traditional and alternative asset pricing models in explaining the cross-section of asset returns. The focus is on unconditional models, commonly used among investors and equity analysts. This paper is based on the research performed by Estrada in 2004 and it extends his approach by introducing the use of GMM. The results suggest that for Emerging markets' investors should give preference to total risk measures over systematic risk measures. Within the category of systematic risk measures, downside beta proved its superiority to traditional CAPM beta. The results can be attributed to delayed integration process, partially justified by the lower FDI and portfolio investments into Emerging markets.

Keywords: Asset Pricing, CAPM, Downside Risk Models
JEL classification: G11, G12, G15, G31

Published: July 30, 2018  Show citation

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Ajrapetova, T. (2018). Cross-Section of Asset Returns: Emerging Markets and Market Integration. European Financial and Accounting Journal, 13(1), 41-60. doi: 10.18267/j.efaj.205
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