The Pricing of Firm-Specific Risk in Emerging Markets

Butt, H. A., & Sadaqat, M. (2020). The Pricing of Firm-specific Risk in Emerging Markets. The Journal of Investment Strategies, 8(4), 21-32.

Posted: 1 Mar 2021

See all articles by Hilal Anwar Butt

Hilal Anwar Butt

University of Karachi - Institute of Business Administration (IBA), Karachi

Mohsin Sadaqat

Institute of Business Administration, Karachi

Date Written: February 28, 2020

Abstract

This paper finds that a zero-investment strategy that goes long (short) in the highest (lowest) quintiles of firm-specific risk earns overall positive excess returns across twenty-one emerging markets. Interestingly, in previous studies such returns were found to be negative for the US and developed markets. Nevertheless, the risk-adjusted alphas of the capital asset pricing model, the Fama and French model and the Carhart model are mostly negative for a number of emerging markets. Thus, the puzzling negative premiums associated with firm-specific risks are ultimately reconciled across global equity markets. The impetus for such negative premiums is primarily given by the firms with the lowest firm-specific risk, as these firms are hedged against market based risks and have significant positive alphas.

Keywords: Emerging Markets, Asset Pricing, Firm-Specific Risks, Market Premium, Alpha

JEL Classification: G10, G12, G15

Suggested Citation

Butt, Hilal Anwar and Sadaqat, Mohsin, The Pricing of Firm-Specific Risk in Emerging Markets (February 28, 2020). Butt, H. A., & Sadaqat, M. (2020). The Pricing of Firm-specific Risk in Emerging Markets. The Journal of Investment Strategies, 8(4), 21-32., Available at SSRN: https://ssrn.com/abstract=3754788

Hilal Anwar Butt

University of Karachi - Institute of Business Administration (IBA), Karachi ( email )

University Road
Karachi, Sindh 75270
Pakistan

Mohsin Sadaqat (Contact Author)

Institute of Business Administration, Karachi ( email )

Pakistan

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