Three essays on emerging financial markets

This dissertation is a contribution to the analysis of emerging financial markets. Essay I studies the financial markets in two Asian emerging markets (Korea and Taiwan) using the consumption-based asset pricing model of Lucas (1978). Financial markets in these two countries have been characterized by high average equity and risk-free returns as well as very high volatilities. The Lucas (1978) model fails to explain the very large size of the equity premium in both countries (the equity premium puzzle), and the historical average risk-free rates in Taiwan (the risk-free rate puzzle) over the entire sample period as well as over the sub-period prior to the recent Asian financial crisis.; Essay II examines whether consumption beta can serve a better measure of risk than market beta. Therefore, I test the performance of the traditional CAPM and CCAPM., across seven industry sub-sectors in the emerging Taiwan stock market. The empirical performance of the CAPM is encouraging. The relationship between stock returns and beta is statistically significant and the coefficient of determination of the CAPM regression is high across all seven sectors of the Taiwan stock market. In comparison, the empirical performance of the CCAPM is disappointing although the consumption beta should offer a better measure of systematic risk theoretically.; Various models of forecasting equity returns in emerging financial markets are conducted in Essay III. The first four models are the univariate time series models of equity returns, including the Autoregressive Integrated Moving Average (ARIMA), and ARIMA incorporating the Autoregressive Conditional Heteroscedasticity (ARCH) Generalized ARCH (GARCH), and Exponential GARCH (EGARCH). The 5 th model employs the asset pricing model of Lucas (1978). The empirical results show that modeling the conditional heteroskedasticity of returns series is important. Among four univariate time series models, the ARMA-EGARCH model is the best model in capturing the behavior of stock market returns series in Korea and Taiwan. In general, the univariate time series models outperform the asset pricing model of Lucas (1978) in terms of goodness of fit and accuracy of both in-sample and out-of-sample forecasts.