The Cross-Section of Returns in Frontier Equity Markets: Integrated or Segmented Pricing?

54 Pages Posted: 4 Mar 2019

See all articles by Adam Zaremba

Adam Zaremba

Montpellier Business School; Poznan University of Economics and Business

Alina Maydybura

University of Dubai

Date Written: December 5, 2018

Abstract

Is asset pricing segmented or integrated in frontier equity markets? To answer this question, we examine the returns on more than 4,500 stocks from 22 frontier countries for the years 1997–2018. We evaluate the performance of a few major asset pricing models. We document strong value and momentum effects but find no consistent evidence regarding size, investment, and profitability premia. The recent six-factor model of Fama and French (2018) outperforms other models and best explains the cross-sectional and time-series variation in returns. Our results point to low integration of frontier equities, even after the global financial crisis. Local risk factors explain the behavior of prices much better than their global counterparts do. The low correlation of these risk factors allows augmenting the efficient frontier of an international investor.

Keywords: frontier equity markets, factor models, asset pricing, stock market integration and segmentation, the cross-section of returns, size, value, momentum, profitability, investment

JEL Classification: G11, G12, G15

Suggested Citation

Zaremba, Adam and Maydybura, Alina, The Cross-Section of Returns in Frontier Equity Markets: Integrated or Segmented Pricing? (December 5, 2018). Emerging Markets Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3332958

Adam Zaremba (Contact Author)

Montpellier Business School ( email )

2300 Avenue des Moulins
Montpellier, Occitanie 34000
France

Poznan University of Economics and Business ( email )

al. Niepodległości 10
Poznań, 61-875
Poland

HOME PAGE: http://adamzaremba.pl

Alina Maydybura

University of Dubai ( email )

AL MAKTOOM STREET
Dubai, 14143
United Arab Emirates

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