Abstract
We extend the studies of the country and industry components of stock returns by exploring fundamental sources of these components. Country and industry effects are generated using company data for 1984–2004 from 13 emerging markets and 11 industries and then regressed on country and firm characteristics to identify their determinants. Macroeconomic variables, financial sector development, and the legal environment all have a significant influence on country effects; industrial and geographical concentration help explain industry effects post-1997. We find that different legal origins matter for the country component of stock returns and suggest that further research on this is needed. The evidence also suggests that globalization alone does not drive stock markets and that country factors will continue to be an important determinant of stock returns.
Similar content being viewed by others
References
Abugri BA (2006) Empirical relationship between macroeconomic volatility and stock returns: evidence from Latin American markets. Int Rev Financ Anal 17(2): 396–410
Allen F, Gale D (2000) Comparing financial systems. MIT Press, Cambridge
Amihud Y, Mendelson H (1986) Asset pricing and the bid-ask spread. J Financ Econ 17(2): 223–249
Baele L, Inghelbrecht K (2005) Structural versus temporary drivers of country and industry Risk. Working Paper, Tilburg University
Bai Y (2008) The Sources of cross-sectional variation in stock returns and risk: an empirical analysis of emerging markets. Unpublished PhD Dissertation, Loughborough University, Loughborough
Bai Y, Green CJ, Leger L (2006) Industry and country factors in stock returns: are emerging markets different? Working Paper, Department of Economics, Loughborough University
Beck T, Levine R (2001) Stock markets, banks, and growth: correlation or causality? Policy Research Working Paper 2670, Washington DC, World Bank
Beck T, Levine R (2003) Legal institutions and financial development. NBER 10126
Beck T, Demirgüç-Kunt A, Levine R (2002) Law and finance: why does legal origin matter? NBER working paper 9379
Bilson CM, Brailsford TJ, Hooper VJ (2001) Selecting macroeconomic variables as explanatory factors of emerging stock market returns. Pac Basin Finance J 9: 401–426
Campa J, Fernandes N (2006) Sources of gains from international portfolio diversification. J Empir Finance 13: 417–443
Chinn MD, Ito H (2005) What matters for financial development? Capital controls, institutions, and interactions. NBER working paper 11370
Christiano LJ, Ilut CL, Motto R, Rostagno M (2008) Monetary policy and stock market boom-bust cycles. ECB Working Paper 955, Frankfurt, European Central Bank (ECB)
Chui ACW, Wei KJ (1998) Book-to-Market, firm size, and the turn-of-the-year effect: Evidence from Pacific-Basin emerging markets. Pac Basin Finance J 6: 275–293
Cobham D, Cosci S, Mattesini F (1999) The Italian financial system: neither bank based nor market based. Manchester Sch 67(3): 325–345
Cobham D, Serre JM (2000) A characterization of the French financial system. Manchester Sch 68(1): 44–67
Darrat AF, Zhong M (2005) Equity market linkage and multinational trade accords: the case of NAFTA. J Int Money Finance 24: 793–817
Datar VT, Naik NY, Radcliffe R (1998) Liquidity and stock returns: an alternative test. J Financ Mark 1: 205–219
Davis EP (2001) Multiple avenues of intermediation, corporate finance and financial stability. International Monetary Fund, Working Paper 115
Dellas H, Hess M (2005) Financial development and stock returns: a cross-country analysis. J Int Money Finance 24: 891–912
Demirguc-Kunt A, Maksimovic V (1998) Law, finance and firm growth. J Finance 53: 2107–2137
Dey MK (2005) Turnover and return in global stock markets. Emerg Mark Rev 6: 45–67
Diamonte RL, Liew JM, Stevens RL (1996) Political risk in emerging and developed markets. Financ Analysts J 71–76
Djankov S, McLiesh C, Shleifer A (2005) Private credit in 129 countries. SSRN working paper W11078
Djankov S, La Porta R, Lopez-de-Silanes F, Shleifer A (2003) Courts. Q J Econ 118: 457–522
Ergungor OE (2003) Financial system structure and economic development: structure matters. Federal Reserve Bank of Cleveland working paper 03-05
Fagernas S, Sarkar P, Singh A (2008) Legal origin, shareholder protection and the stock market: new challenges from time series analysis. In: Gugler K, Yurtoglu B (eds) The economics of corporate governance and mergers. Edward Elgar, Cheltenham
Fama EF, French KR (1992) The cross-section of stock returns. J Finance 47: 427–465
Fama EF, French KR (1996) Multifactor explanations of asset pricing anomalies. J Finance 51: 55–84
Ferson W, Harvey C (1993) The risk and predictability of international equity returns. Rev Financ Stud 6: 527–566
Griffin JM, Karolyi GA (1998) Another look at the role of the industry structure of markets for international diversification strategies. J Financ Econ 50: 351–373
Heston SL, Rouwenhorst GK (1994) Does industrial structure explain the benefits of international diversification?. J Financ Econ 36: 3–27
Karpoff JM (1987) The relation between price changes and trading volume: a survey. J Financ Quant Anal 22: 109–126
La Porta R, Lopez-de-Silanes F, Shleifer A, Vishny RW (1997) Legal determinants of external finance. J Finance 52: 1131–1150
La Porta R, Lopez-de-Silanes F, Shleifer A, Vishny RW (1998) Law and finance. J Pol Econ 106: 1113–1155
La Porta R, Lopez-de-Silanes F, Shleifer A, Vishny RW (2002) Investor protection and corporate valuation. J Finance 57: 1147–1170
Lele P, Siems M (2007) Shareholder protection: a Leximetric approach. J Corp Law Stud 7(1): 17–50
Levine R (1999) Law, finance, and economic growth. J Financ Intermediation 8: 36–67
L’Her J, Sy O, Tnani MY (2002) Country, industry, and risk factor loadings in portfolio management. J Portf Manag 28(4): 70–80
Li K, Morck R, Yang F, Yeung B (2004) Firm-specific variation and openness in emerging markets. Rev Econ Stat 86(3): 658–669
Modigliani F, Cohn R (1979) Inflation, rational valuation and the market. Financ Analysts J 35(2): 24–44
Najand M, Noronha G (1998) Causal relations among stock returns, inflation, real activity, and interest rates: evidence from Japan. Glob Finance J 9(1): 71–80
Nickell S, Nicolitsasa D, Dryden N (1997) What makes firms perform well. Eur Econ Rev 41(3–5): 783–796
Pagano M, Volpin P (2006) Shareholder protection, stock market development, and politics. J Eur Econ Assoc 4(2-3): 315–341
Phylaktis K, Ravazzolo F (2005) Stock prices and exchange rate dynamics. J Int Money Finance 24: 1031–1053
Phylaktis K, Xia L (2006a) The changing role of industry and country effects in the global equity markets. Eur J Finance 12(8): 627–648
Phylaktis K, Xia L (2006b) Sources of firms’ industry and country effects in emerging markets. J Int Money Finance 25: 459–475
Rajan R, Zingales L (2003) The great reversals: the politics of financial development in the twentieth century. J Financ Econ 69: 5–50
Rigobon R, Rodrik D (2004) Rule of law, democracy, openness, and income: estimating the interrelationships. NBER working paper 10750
Roll R (1992) Industrial structure and comparative behaviour of international stock market indices. J Finance 47: 3–42
Rouwenhorst KG (1999) Local return factors and turnover in emerging stock markets. J Finance 54: 1439–1464
Sang-Gyung J, Marathe A, Shawky HA (2003) Liquidity and stock markets in emerging equity markets. Emerg Mark Rev 4: 1–24
Sarkar P, Singh A (2009) Law, finance and development: further analyses of longitudinal data. Camb J Econ 1–22
Saunders A, Tress RB (2007) Inflation and stock market returns: some Australian evidence. Econ Rec 57(1): 58–66
Serra AP (2000) Country and industry factors in returns: evidence from emerging markets’ stocks. Emerg Mark Rev 1: 127–151
Steliaros ME, Thomas DC (2006) The cross-sectional variability of stock-price returns: country and sector effects revisited. City University, Cass Business School Research Paper, March
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Bai, Y., Green, C.J. Determinants of cross-sectional stock return variations in emerging markets. Empir Econ 41, 81–102 (2011). https://doi.org/10.1007/s00181-010-0437-9
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s00181-010-0437-9
Keywords
- Cross-sectional stock return variation
- Country effects
- Industry effects
- Emerging markets
- Financial development
- Legal system