Combining local and global markets in asset pricing in emerging markets: evidence from three BRICS nations

Asset pricing models, originally designed for the US market, assume sufficiency of local market in capturing systematic market risk in the stock returns. The models were extended to other developed markets that are fully integrated with the US market by replacing the local market with the global...

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Main Authors:	Hakim, Shabir Ahmad, Hamid, Zarinah, Meera, Ahamed Kameel Mydin
Format:	Article
Language:	English
Published:	Tennessee State University 2015
Subjects:	HB221 Price HG Finance
Online Access:	http://irep.iium.edu.my/44939/ http://irep.iium.edu.my/44939/ http://irep.iium.edu.my/44939/1/Journal_of_Developing_Areas_Vol_49%283%29_365-78_2015-Shabir%2C_Zarinah_and_Kameel.pdf

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spelling	iium-449392017-10-31T10:49:06Z http://irep.iium.edu.my/44939/ Combining local and global markets in asset pricing in emerging markets: evidence from three BRICS nations Hakim, Shabir Ahmad Hamid, Zarinah Meera, Ahamed Kameel Mydin HB221 Price HG Finance Asset pricing models, originally designed for the US market, assume sufficiency of local market in capturing systematic market risk in the stock returns. The models were extended to other developed markets that are fully integrated with the US market by replacing the local market with the global market. However, the ability of these models to capture systematic risks and explain stock returns in emerging markets is undermined by emerging markets’ partial integration with and structural differences from the developed markets. In these markets, relying only on local or global market is expected to cause loss of valuable return-relevant information leading to inaccuracies in the return estimates. To customize the asset pricing models to emerging markets settings, we propose combining local and global markets in the models. In this regard, we extend Koedijk et al. model by replacing global instruments with global market portfolio to propose a two-factor CAPM, and Fama & French three-factor model by adding global market portfolio as the fourth factor. We test the proposed models in three BRICS nations, China, India, and South Africa, using ten-year, monthly data from January 2004 to December 2013 on non-financial firms with positive equity holdings. We apply Fama & French double sort on size and book to market value of equity on listed firms to construct nine dependent portfolios. The sort procedure is also used to construct two portfolios— SMB and HML—used along with market portfolios as explanatory variables in Fama & French models. The test results of the models reveal differences in the behaviors of the markets studied. The Chinese market behaves like a fully segmented market wherein local market portfolio subsumes the effect of the global market in both models. On the other hand, the South African market acts like a partially integrated market where both local and global market portfolios have significant impact on the stock returns. The Indian market behaves like a segmented market in two-factor model and like a partially-integrated market in the four-factor model. Hence, we conclude that incorporation of local and global markets in asset pricing in emerging markets in necessary to insure against inaccuracies in the stock return estimates. The proposed models provide investors and investment managers with tools for gauging risks involved in investing in emerging markets and making wellinformed investment decisions. Tennessee State University 2015 Article PeerReviewed application/pdf en http://irep.iium.edu.my/44939/1/Journal_of_Developing_Areas_Vol_49%283%29_365-78_2015-Shabir%2C_Zarinah_and_Kameel.pdf Hakim, Shabir Ahmad and Hamid, Zarinah and Meera, Ahamed Kameel Mydin (2015) Combining local and global markets in asset pricing in emerging markets: evidence from three BRICS nations. The Journal of Developing Areas, 49 (3). pp. 365-378. ISSN 0022-037X (P), 1548-2278 (O) https://muse.jhu.edu/journals/journal_of_developing_areas/
repository_type	Digital Repository
institution_category	Local University
institution	International Islamic University Malaysia
building	IIUM Repository
collection	Online Access
language	English
topic	HB221 Price HG Finance
spellingShingle	HB221 Price HG Finance Hakim, Shabir Ahmad Hamid, Zarinah Meera, Ahamed Kameel Mydin Combining local and global markets in asset pricing in emerging markets: evidence from three BRICS nations
description	Asset pricing models, originally designed for the US market, assume sufficiency of local market in capturing systematic market risk in the stock returns. The models were extended to other developed markets that are fully integrated with the US market by replacing the local market with the global market. However, the ability of these models to capture systematic risks and explain stock returns in emerging markets is undermined by emerging markets’ partial integration with and structural differences from the developed markets. In these markets, relying only on local or global market is expected to cause loss of valuable return-relevant information leading to inaccuracies in the return estimates. To customize the asset pricing models to emerging markets settings, we propose combining local and global markets in the models. In this regard, we extend Koedijk et al. model by replacing global instruments with global market portfolio to propose a two-factor CAPM, and Fama & French three-factor model by adding global market portfolio as the fourth factor. We test the proposed models in three BRICS nations, China, India, and South Africa, using ten-year, monthly data from January 2004 to December 2013 on non-financial firms with positive equity holdings. We apply Fama & French double sort on size and book to market value of equity on listed firms to construct nine dependent portfolios. The sort procedure is also used to construct two portfolios— SMB and HML—used along with market portfolios as explanatory variables in Fama & French models. The test results of the models reveal differences in the behaviors of the markets studied. The Chinese market behaves like a fully segmented market wherein local market portfolio subsumes the effect of the global market in both models. On the other hand, the South African market acts like a partially integrated market where both local and global market portfolios have significant impact on the stock returns. The Indian market behaves like a segmented market in two-factor model and like a partially-integrated market in the four-factor model. Hence, we conclude that incorporation of local and global markets in asset pricing in emerging markets in necessary to insure against inaccuracies in the stock return estimates. The proposed models provide investors and investment managers with tools for gauging risks involved in investing in emerging markets and making wellinformed investment decisions.
format	Article
author	Hakim, Shabir Ahmad Hamid, Zarinah Meera, Ahamed Kameel Mydin
author_facet	Hakim, Shabir Ahmad Hamid, Zarinah Meera, Ahamed Kameel Mydin
author_sort	Hakim, Shabir Ahmad
title	Combining local and global markets in asset pricing in emerging markets: evidence from three BRICS nations
title_short	Combining local and global markets in asset pricing in emerging markets: evidence from three BRICS nations
title_full	Combining local and global markets in asset pricing in emerging markets: evidence from three BRICS nations
title_fullStr	Combining local and global markets in asset pricing in emerging markets: evidence from three BRICS nations
title_full_unstemmed	Combining local and global markets in asset pricing in emerging markets: evidence from three BRICS nations
title_sort	combining local and global markets in asset pricing in emerging markets: evidence from three brics nations
publisher	Tennessee State University
publishDate	2015
url	http://irep.iium.edu.my/44939/ http://irep.iium.edu.my/44939/ http://irep.iium.edu.my/44939/1/Journal_of_Developing_Areas_Vol_49%283%29_365-78_2015-Shabir%2C_Zarinah_and_Kameel.pdf
first_indexed	2023-09-18T21:03:54Z
last_indexed	2023-09-18T21:03:54Z
_version_	1777410805173583872

Combining local and global markets in asset pricing in emerging markets: evidence from three BRICS nations

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