Risk and Return in the Next Frontier

Journal of Emerging Market Finance, Vol. 7, pp. 43-80, January 2008

34 Pages Posted: 17 Dec 2009

See all articles by Eric Girard

Eric Girard

Siena College - School of Business

Amit Sinha

Bradley University - Department of Finance

Date Written: 2008

Abstract

This article investigates the risk-return relations of stocks traded in frontier markets, a class of small, illiquid, less accessible and less known emerging markets that has escaped the attention of many researchers. We examine the cross-section of risk premiums of 360 stocks traded in 19 frontier markets for the period from January 1997 to June 2004. We first observe that frontier markets provide greater return potentials than emerging and developed markets as well as further diversification benefits. Our investigation indicates that the risks involved when investing in frontier markets can be better understood by using a multifactor extension of CAPM which consists of fundamental factors like beta, price to book, and size, and country specific factors including political, economic and financial risk ratings. Two surprising findings emerge from this study: (1) small and value stocks are less risky investment avenues than large and growth stocks, and (2) political, economic and financial risk factors have the greatest impact on risk premiums. Global investors should pay greater attention to institutional reforms in frontier economies leading to a more decentralized political system, improved national governance, and a more transparent institutional and legal framework.

Keywords: Emering Markets, Equity, EMDB, ICRG

JEL Classification: F30, G12

Suggested Citation

Girard, Eric and Sinha, Amit, Risk and Return in the Next Frontier (2008). Journal of Emerging Market Finance, Vol. 7, pp. 43-80, January 2008, Available at SSRN: https://ssrn.com/abstract=1522508

Eric Girard (Contact Author)

Siena College - School of Business ( email )

Siena Hall 301
515 Loudon Road
Loudonville, NY 12211-1462
United States

Amit Sinha

Bradley University - Department of Finance ( email )

1501 West Bradley Avenue
Peoria, IL 61625
United States
3096773582 (Phone)

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