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Testing Factor Models on the Stock Returns of BRICS Countries

  • Most of the studies on factor models have been based on the U.S. stock market. Results of these studies have shown that conventional factor models explain the vast part of its return variation and that each of these models strengthens the descriptive power of the traditional CAPM. However, when applying factor models on the stock markets of emerging countries, studies have yielded rather mixed results. Even though most of them find that conventional factor models explain a major part of their returns, they argue that other country-specific risk factors should also be considered, in order derive a model that describes their returns in the most comprehensive way. For this reason, this paper investigates the significance of both common and specific risk factors, in order to find which are the most important risk factors that impact the performance of the stock markets in the BRICS countries. The effect of systematic co-moments is also tested. Empirical evidence shows that the market premium is the most significant risk factor for all of the BRICS countries. Additionally, the value, size and momentum factors are proven to be insignificant, whereas the investment and profitability factors are among the main determinants of stock returns. Specific factors also appear to be more important than the common one. Moreover, the popular extensions of the CAPM and higher-order moments do not substantially strengthen its descriptive power. Additionally, conventional factor models explain a lower part of the return variation of the BRICS countries compared to the U.S. stock market, indicating that they do not possess the same explanatory power in developed and emerging markets.

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Metadaten
Author:Nora Marinova
Referee:Ursula Walther
Advisor:Axel Hellmann
Document Type:Master's Thesis
Language:English
Date of first Publication:2019/12/16
Publishing Institution:Hochschulbibliothek HWR Berlin
Granting Institution:Hochschule für Wirtschaft und Recht Berlin
Date of final exam:2019/07/22
Release Date:2019/12/16
Tag:BRICS; Common Risk Factors; Emerging Markets; Factor Models; Stock Market
Page Number:67
Institutes:FB I - Wirtschaftswissenschaften / International Finance M.Sc.
Licence (German):License LogoUrheberrechtsschutz