What Explains The Equity Risk Premium In ASEAN Countries?

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Soo-Hyun Kim
Katherine Villalobos

Keywords

Equity Premium, Panel Pooled Regression, Panel Vector Error Correction Model (VECM), Cointegration, Granger Casuality Test

Abstract

This paper aims to mainly investigate the impact of the selected macroeconomic variables such as inflation (INF), gross domestic product (GDP), foreign direct investment (FDI) and stocks traded turn-over ratio (STTR) on equity risk premium (ERP) of six major ASEAN member countries such as Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam.  Applied methods are panel pooled regression and panel vector error correction model (VECM) through the latest version of Eviews9. In the former approach, among the selected macroeconomic variables, both INF and STTR significantly and positively affect the ERP. Both periods and years show to have fixed effects as dummy variables. One cointegration has been determined among macroeconomic variables and ERP suggesting a long term equilibrium association which led to employ Panel VECM. INF denotes a significant long-run relationship with ERP and the error correction term results suggest deviation of INF is a relevant factor but not the errors of liquidity as the STTR didn't show any significant impact in the model. Granger Casuality test suggests both INF and ERP do granger causes each other in the short run. Thus, inflation is a robust factor of ERP in two different methods while the STTR is not a robust as it shows different results. 

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