Variations in Emerging-Market Equity Premia: Impact of Financial Architecture

26 Pages Posted: 13 Feb 2011

See all articles by Raj Aggarwal

Raj Aggarwal

University of Akron; Federal Reserve Banks - Federal Reserve Bank of Cleveland; Kent State University; Kent State University Foundation

John W. Goodell

University of Akron - Department of Finance, College of Business Administration

Date Written: January 1, 2011

Abstract

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

Aggarwal, Raj and Goodell, John W., Variations in Emerging-Market Equity Premia: Impact of Financial Architecture (January 1, 2011). Available at SSRN: https://ssrn.com/abstract=1760107 or http://dx.doi.org/10.2139/ssrn.1760107

Raj Aggarwal (Contact Author)

University of Akron ( email )

Akron, OH 44325-4803
United States

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Kent State University ( email )

College of Business Administration
Kent, OH 44242-0001
United States

Kent State University Foundation ( email )

Akron, OH 44325-4803
United States

John W. Goodell

University of Akron - Department of Finance, College of Business Administration ( email )

259 S. Broadway
Akron, OH 44325
United States

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