پروفایل های ریسک: چگونه می توان این پروفایل های ریسک را هنگام سقوط بازار سهام تغییر داد؟

This paper has two main objectives: the first is to unveil the relative importance of global versus local risk factors in influencing excess returns in the emerging country stock markets; the second is to analyse how the observed risk profiles change when markets undergo a major crisis. Our main country of focus is Mexico, but we also analyse six Asian countries which went through the 1997 Asian crisis. Our findings indicate that during stable periods investors are mainly concerned about global risk factors, whereas close to a crisis they also include local factors in their information sets in forming expectations about future excess returns.

Asset valuation models such as the Capital Asset Pricing Model (CAPM) and the Asset Pricing Theory (APT) have received considerable attention in both the theoretical as well as the empirical finance literature, and have been widely applied to try to explain the risk-return behaviour of stock markets. In the late 80s international versions of these models, such as the International CAPM and APT were developed. The main idea underlying these models is the ‘law of one price’: if markets are globally integrated then risk should be priced equally across all markets. For this reason, international models have been primarily used to test the degree of integration of international stock markets.1 Generally, the literature has focused mainly on developed markets, trying to appraise the validity of the postulated models; only recently has the interest shifted towards emerging markets. Following the liberalisation of capital controls in the late eighties, emerging country equity markets have seen their market capitalisation rise from US $740 billion in 1990 to 2200 billion in 1996, as investors have recognised a profitable diversification opportunity in these markets. Due to their low correlation with developed stock markets, emerging stock markets allow investors to shift favorably their risk-return efficient frontier.2 This observation induced massive capital inflows into these countries and at the same time moved academic interest from developed to emerging markets. Yet, the literature remained surprisingly single-angled with most studies using an international pricing model to assess the degree of integration of these markets into world capital markets. An important problem with this approach is that full market integration must be assumed in order to conduct the analysis. However, results for emerging markets are mixed and are far from confirming their perfect integration with world markets. This raises doubts about the adequacy of such frameworks for emerging markets. Pushing this argument further, we would like to ask the question: how helpful can these models be in explaining asset prices in the face of a local crisis, such as the 1997 Asian crisis. Probably not very helpful. In these models only global sources of risk are considered, and hence these are unlikely to account for a local crisis. This is the starting point of our study. This paper takes a distinct approach and tries to understand these markets on a country basis first. Building on previous work we estimate a domestic APT model for each country (i.e. excess returns are expressed in local currency), including both global (proxied by an aggregate for the G7 countries) and local (country-specific) risk factors. Unlike previous studies, this approach is new as global and local factors co-exist in the same model allowing us to assess their relative importance as relevant sources of systematic risk. The results also provide some insights about the degree of integration of these markets, but in a more flexible way than when using an international asset pricing framework, as risk premia are not restricted to be equal across markets. Another innovative aspect of this paper is that it considers how the results are altered when the market goes through a crisis. A crisis is defined in terms of an abnormal fall in excess return.3 We investigate whether we can observe any significant variation in the risk profile of a given market when it moves from a stable to a crisis period. Our main focus is Mexico, but our sample also includes the Asian countries which have been subject to the 1997 crisis: Indonesia, Korea, Malaysia, Philippines, Singapore and Thailand. The model proposed here, where both global and local variables are included, provides us with an adequate framework to study a possible shift in investors’ behaviour when approaching a crisis. Lastly, Taiwan and Chile are used as a ‘control sample’, as these two countries are in many dimensions very similar to the crises’ countries mentioned above, and yet their stock market did not collapse to the same extent. The results show that even if global factors play an important role in these markets, therefore, signalling a certain degree of integration, local factors still continue to be relevant. Most importantly, there appears to be a pattern in the way global and local factors become significant and insignificant over time. Local factors seem to be especially significant when approaching a crisis (up to 2 years before the actual collapse) and during a crisis. Hence, our findings indicate that during stable periods investors are only concerned about global risk factors, while close to a crisis they include local factors in their information sets when forming expectations about future excess returns. The fact that we do not observe this shift in Taiwan and Chile confirms that this shift is not coincidental, but induced by crisis’ expectations. To the best of our knowledge we do not know of any study which uses a similar model to study emerging markets; and which at the same time looks at the influence of a crisis on excess returns’ and investors’ behaviour. These results may be useful to any investor or portfolio manager interested in understanding potential sources of risk in these markets, and we hope that they will also motivate further research on the importance of global versus local variables as well as the impact of a crisis on asset price formation. Moreover, if as indicated by our results, investors seem to concentrate more on local variables when approaching a crisis, then this type of information could be considered in the search of possible leading indicators of financial crises. The rest of this paper is organised as follows, the next section briefly reviews the existing empirical literature on asset pricing in emerging markets. Section 3 outlines the methodology and the model used in this paper and Section 4 presents the data. In Section 5 we report the results, and finally Section 6 concludes.

In this paper we used a multi-factor model and asset pricing relationship to uncover the risk profiles of various emerging markets. The main goal was to analyse the relative importance of global versus local risk factors in seven emerging markets. For this purpose we estimated for each country an APT model with five global (G7 aggregated) and three local (national) macroeconomic risk factors. The results show that markets are mainly affected by global forces (with the world market index dominating), therefore, signalling a certain degree of integration. Yet, local factors are significant and especially relevant when approaching a crisis. This parallel importance of global and local risk factors is a new result. From the best of our knowledge, it is the first time that such a framework with both global and local factors is used to study risk sensitivities. The results shed new light both on the degree of integration and the possible relevant risk factors at play in these markets. The second purpose of this paper was to investigate the change in the risk profiles of the markets over time and especially when entering a crisis. The results are striking: we find that local factors tend to be significant in a time span of approximately 4 years around the happening of a crisis. Outside this range investors do not seem to take local factors into account. We observe this result in Mexico and for most of our Asian countries. While a shift in the risk profile of a given market or investors’ perception of risk may not be a necessary or sufficient condition for a crisis to ensue, it may well constitute a useful indicator for possible turning points. The fact that we do not observe this shift for our ‘control countries’ further strengthens this result.