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
Date Written: February 28, 2020
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: Suggested Citation