| Many developing countries have initiated capital markets, called emerging markets. As a group, these markets have experienced explosive rates of growth. Previous research has portrayed these markets as having high returns along with high volatility. However, the research in these markets has been sparse due to the limited availability of stock return data. This dissertation examines monthly stock returns from 26 emerging capital markets to determine if these markets are segmented from the global capital market. In addition, we examine which priced factors are significant and if there is some diversification of these risk factors as markets are grouped together.; The first part of this dissertation examines the level of integration each of the emerging markets exhibit with the world market. We hypothesize that these markets are segmented from the global market. Our findings support this conjecture.; We also examine the priced risk factors in the dissertation. We find for the individual emerging markets that the price-to-book value ratio (p/bv) and shares traded are significant for the majority of the markets. They are both significant in the positive direction, thus displaying growth and liquidity effects. Price-to-earnings ratio (p/e), exchange rate beta, and size are also significant in a several markets.; To determine the diversification effects, we group emerging markets together, first into regions, then all together, and finally together with U.S. stocks. The results of our tests show that size and p/e become diversified away as the emerging markets are combined together. When the U.S. stocks are added, p/bv and size are both significant.; This research offers both practical and academic applications. The findings provide insight into which factors are priced in emerging markets and how this changes as markets are combined together and added to the U.S. market. Future research will allow us to examine the investible effect in these markets, which measures the percent of the firm that can be owned by foreigners. |
