Can Investor Heterogeneity be Used to Explain the Cross-Section of Average Stock Returns in Emerging Markets?

48 Pages Posted: 4 Feb 2010

See all articles by Chan Shik Jung

Chan Shik Jung

Dong-A University Business School; Korea University

Dong Wook Lee

Korea University

Kyung Suh Park

Korea University - Department of Finance

Date Written: December 9, 2008

Abstract

This paper examines whether investor heterogeneity can be used for asset-pricing purposes in emerging markets. We pose this question, since the lack of transparency and greater uncertainty, which are typical of those markets, render it more likely that investors will disagree with each other and hold different portfolios, resulting in a mean-variance inefficient market portfolio. Consequently, we examine whether a heterogeneity-based factor can sufficiently augment the market portfolio, so that the two can function as multivariate proxies for the tangency portfolio. We test this hypothesis in the Korean stock market in which the measures of heterogeneity such as foreign ownership and institutional holdings are available for a large number of stocks over an extended period of time. We find that the heterogeneity-augmented two-factor model outperforms the CAPM one-factor and the Fama-French three-factor models. Consistent with the greater severity of investor heterogeneity in emerging markets, a developed market with comparable data availability, namely, Japan, shows similar but weaker test results.

Keywords: investor heterogeneity, emerging market, multivariate proxies for tangency portfolio, factor model

JEL Classification: G11, G12, G15

Suggested Citation

Jung, Chan Shik and Lee, Dong Wook and Park, Kyung Suh, Can Investor Heterogeneity be Used to Explain the Cross-Section of Average Stock Returns in Emerging Markets? (December 9, 2008). Available at SSRN: https://ssrn.com/abstract=1084825 or http://dx.doi.org/10.2139/ssrn.1084825

Chan Shik Jung

Dong-A University Business School ( email )

2-Ga Bumin-Dong
Busan
Korea, Republic of (South Korea)

Korea University ( email )

1 Anam-dong 5 ka
Seoul, 136-701
Korea, Republic of (South Korea)

Dong Wook Lee (Contact Author)

Korea University ( email )

1 Anam-dong 5 ka
Seoul, 136-701
Korea, Republic of (South Korea)
+82.2.3290.2820 (Phone)
+82.2.3290.1307 (Fax)

Kyung Suh Park

Korea University - Department of Finance ( email )

Seoul, 136-701
United States

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