The pricing of firm-specific risk in emerging markets

Hilal Anwar Butt and Mohsin Sadaqat

Journal of Investment Strategies

Abstract: This paper finds that a zero-investment strategy that goes long (short) in the highest (lowest) quintiles of firm-specific risk earns overall positive excess returns across twenty-one emerging markets. Interestingly, in previous studies such returns were found to be negative for the US and developed markets. Nevertheless, the risk-adjusted alphas of the capital asset pricing model, the Fama and French model and the Carhart model are mostly negative for a number of emerging markets. Thus, the puzzling negative premiums associated with firm-specific risks are ultimately reconciled across global equity markets. The impetus for such negative premiums is primarily given by the firms with the lowest firm-specific risk, as these firms are hedged against market based risks and have significant positive alphas.

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Persistent link: https://EconPapers.repec.org/RePEc:rsk:journ6:7471356

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