The Evolution Of Risk Premiums In Emerging Stock Markets: The Case Of Latin America And Asia Region

Abstract

This paper employs a conditional version of the International Capital Asset Pricing Model (ICAPM) to investigate the determinants of regional integration of stock markets in Latin America and Asia over the period 1996-2008. This model allows for three sources of time-varying risks: common international market risk, exchange rate risk, and regional market risk. At the empirical level, we make use of the asymmetric multivariate BEKK-GARCH of Baba et al.’s (1990) process to simultaneously estimate the ICAPM. Our results show that the currency risk premium is the most important component of the total premium followed by the global market premium. As for the regional risk, our findings show that it is significantly priced for our studied emerging regions but its contribution to the total risk premium is weak.