Does Total Risk Matter? The Case of Emerging Markets

35 Pages Posted: 1 Jul 2015

See all articles by Eric Girard

Eric Girard

Siena College - School of Business

Amit Sinha

Indiana State University

Multiple version iconThere are 2 versions of this paper

Date Written: June 30, 2015

Abstract

This paper examines the relationships between market risk premiums, time-varying variance and covariance in forty-eight emerging, and seven developed capital markets. We allow each market’s risk premium generating process to be state-dependent by accounting for negative and positive market price of variance and covariance risk. We find that half of the emerging markets exhibit reward to world variance while for the other half are only sensitive to local risk factors. We also find evidence of a negative relationship between reward to local risk and reward to world risk. Accordingly, the relative importance of one reward versus the other depends on the ever-changing correlation with the world market. Finally, we show that correlation is not a factor that explains reward to local risk in few segmented capital markets.

Keywords: reward to risk, conditional risk, market price of risk, multivariate GARCH

JEL Classification: G12, G15

Suggested Citation

Girard, Eric and Sinha, Amit, Does Total Risk Matter? The Case of Emerging Markets (June 30, 2015). Multinational Finance Journal, Vol. 10, No. 1/2, p. 117-151, 2006, Available at SSRN: https://ssrn.com/abstract=2625058

Eric Girard (Contact Author)

Siena College - School of Business ( email )

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

Amit Sinha

Indiana State University ( email )

Terre Haute, IN 47809
United States

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