Variations in Emerging-Market Equity Premia: Impact of Financial Architecture
26 Pages Posted: 13 Feb 2011
Date Written: January 1, 2011
This paper examines a topic of much interest, the association of financial architecture and national equity premia for recent eight-year period from fifteen emerging-market countries. Modeling simultaneously our estimate of the ex ante equity premium as a dependent variable and our measure of financial architecture as an instrumental variable, we document that equity premia are larger in countries that have a more bank-oriented financial architecture; as well as greater control of corruption, more foreign access to capital, and higher spending on education. Smaller equity premia are associated with greater political stability, greater measures against self dealing, higher market volatility, and greater uncertainty avoidance. Given this importance of the ex-ante equity premium in long-term investment decisions, the anticipated demographic challenges and financial reform in most countries, and recent increases in cross-border investment, there is much interest among bankers, managers, and policy makers in these results documenting the determinants of cross-national variations in equity premia.
Keywords: financial institutions, banks, financial markets, pensions, demographics, emerging markets, legal systems, uncertainty avoidance, social trust, property rights, corruption
JEL Classification: G10, G20, N20, O16
Suggested Citation: Suggested Citation