Role of International Trade Competitive Advantage and Corporate Governance Quality in Predicting Equity Returns: Static and Conditional Model Proposals for an Emerging Market

Journal of Risk and Financial Management 14: 125. https://doi.org/10.3390

31 Pages Posted: 30 Mar 2021

See all articles by Erol Muzır

Erol Muzır

Istanbul Medeniyet University

Cevdet Kizil

Istanbul Medeniyet University

Burak Ceylan

affiliation not provided to SSRN

Date Written: March 10, 2021

Abstract

This paper aims to develop some static and conditional (dynamic) models to predict portfolio returns in the Borsa Istanbul (BIST) that are calibrated to combine the capital asset-pricing model (CAPM) and corporate governance quality. In our conditional model proposals, both the traditional CAPM (beta) coefficient and model constant are allowed to vary on a binary basis with any degradation or improvement in the country’s international trade competitiveness, and meanwhile a new variable is added to the models to represent the portfolio’s sensitivity to excess returns on the governance portfolio (BIST Governance) over the market. Some robust and Bayesian linear models have been derived using the monthly capital gains between December 2009 and December 2019 of four leading index portfolios. A crude measure is then introduced that we think can be used in assessing governance quality of portfolios. This is called governance quality score (GQS). Our robust regression findings suggest both superiority of conditional models assuming varying beta coefficients over static model proposals and significant impact of corporate governance quality on portfolio returns. The Bayesian model proposals, however, exhibited robust findings that favor the static model with fixed beta estimates and were lacking in supporting significance of corporate governance quality.

Keywords: static and conditional asset-pricing models, corporate governance quality, international trade capability, robust linear regression, Bayesian regression, Borsa Istanbul

JEL Classification: G11, G12, G17

Suggested Citation

Muzır, Erol and Kizil, Cevdet and Ceylan, Burak, Role of International Trade Competitive Advantage and Corporate Governance Quality in Predicting Equity Returns: Static and Conditional Model Proposals for an Emerging Market (March 10, 2021). Journal of Risk and Financial Management 14: 125. https://doi.org/10.3390, Available at SSRN: https://ssrn.com/abstract=3815319

Erol Muzır

Istanbul Medeniyet University ( email )

D-100 Karayolu
Merdivenkoy Mevkii No:6/1 Goztepe/Kadıkoy
Istanbul
Turkey

Cevdet Kizil (Contact Author)

Istanbul Medeniyet University ( email )

D-100 Karayolu
Merdivenkoy Mevkii No:6/1 Goztepe/Kadıkoy
Istanbul
Turkey

Burak Ceylan

affiliation not provided to SSRN

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