Frontier Stock Markets: Local vs Global Factors

39 Pages Posted: 10 Mar 2017  

Douglas W. Blackburn

Fordham University

Nusret Cakici

Fordham University

Date Written: March 1, 2017

Abstract

We study the returns of stocks from twenty-one frontier markets divided into the four regions of Europe, Africa, Middle East and Asia from January 2006 to June 2016. Factor mimicking portfolios based on market capitalization (SMB), book-to-market equity (HML), and momentum (WML) are constructed and reveal large and significant returns associated with value and momentum in frontier markets. Different from the developed markets, value and momentum effects are observed in both large and small market cap stocks. Empirical asset pricing models are not able to explain the observed value and momentum return patterns. Local asset pricing models, which use factors constructed from frontier market returns, and global asset pricing models, which use factors derived from developed market returns, are rejected in nearly all cases; however, the local four-factor model strongly outperforms the local single-factor capital asset pricing model (CAPM) for all regions, and the local four-factor model is found to be vastly superior to all global models. Surprisingly, there is no difference in performance between the global one-factor CAPM and the global four-factor model in explaining frontier stock market returns. This evidence strongly suggests that frontier and developed markets are segmented.

Keywords: Frontier markets, Cross-section of returns, International asset pricing, Fama-French factors, Momentum, Value premium, Size effect

JEL Classification: F30, G10, G11, G12, G15

Suggested Citation

Blackburn, Douglas W. and Cakici, Nusret, Frontier Stock Markets: Local vs Global Factors (March 1, 2017). Gabelli School of Business, Fordham University Research Paper No. 2930491. Available at SSRN: https://ssrn.com/abstract=2930491

Douglas W. Blackburn (Contact Author)

Fordham University ( email )

45 Columbus Ave
New York City, NY 10023
United States

Nusret Cakici

Fordham University ( email )

Fordham University
Graduate School of Business
New York, NY 10023
United States
2126366776 (Phone)

Paper statistics

Downloads
252
Rank
100,336
Abstract Views
1,069