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Industry costs of equity: evidence from frontier markets

Industry costs of equity: evidence from frontier markets
Industry costs of equity: evidence from frontier markets

Frontier markets are considered a good destination for international diversification due to their low level of integration with global markets. However, a diversification strategy into frontier markets with respect to country factors does not optimally capture their full diversification potential. Enhancing this strategy by simultaneously incorporating industry factors improves the ability to diversify portfolio risk. We investigate the industry costs of equity in frontier markets using five asset pricing models, taking into account the differences in five regions of frontier markets, namely, Africa, Eastern Europe, the Middle East, Latin America and Caribbean, and Asia. Additionally, we examine how well the explanatory factors of developed and emerging markets can explain industry returns in frontier markets. Our results precisely identified two industries in Africa, and two industries in Eastern Europe that exhibit segmentation from developed markets, and two industries in Africa and one industry in Asia show segmentation from emerging markets. However, we document the limited temporal variation in four regions of frontier markets indicating more precise estimates than US, UK, and European ones. Unlike previous studies, our findings show that the time-varying slopes in frontier markets follow a random-walk process.

Asset pricing, Fama and French, cost of equity, frontier markets, industry, Industry, Cost of equity, Frontier markets
1057-5219
Hourani, Alya
0be9c4a5-ae8e-4883-a485-48c0d3df294b
Wang, Yan
aa774477-d5e0-47e5-8122-b9f87c61d8a1
Demiralay, Sercan
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McGroarty, Frank
693a5396-8e01-4d68-8973-d74184c03072
Hourani, Alya
0be9c4a5-ae8e-4883-a485-48c0d3df294b
Wang, Yan
aa774477-d5e0-47e5-8122-b9f87c61d8a1
Demiralay, Sercan
7f793a89-7e3f-448d-829c-450747a01a94
McGroarty, Frank
693a5396-8e01-4d68-8973-d74184c03072

Hourani, Alya, Wang, Yan, Demiralay, Sercan and McGroarty, Frank (2023) Industry costs of equity: evidence from frontier markets. International Review of Financial Analysis, 87, [102573]. (doi:10.1016/j.irfa.2023.102573).

Record type: Article

Abstract

Frontier markets are considered a good destination for international diversification due to their low level of integration with global markets. However, a diversification strategy into frontier markets with respect to country factors does not optimally capture their full diversification potential. Enhancing this strategy by simultaneously incorporating industry factors improves the ability to diversify portfolio risk. We investigate the industry costs of equity in frontier markets using five asset pricing models, taking into account the differences in five regions of frontier markets, namely, Africa, Eastern Europe, the Middle East, Latin America and Caribbean, and Asia. Additionally, we examine how well the explanatory factors of developed and emerging markets can explain industry returns in frontier markets. Our results precisely identified two industries in Africa, and two industries in Eastern Europe that exhibit segmentation from developed markets, and two industries in Africa and one industry in Asia show segmentation from emerging markets. However, we document the limited temporal variation in four regions of frontier markets indicating more precise estimates than US, UK, and European ones. Unlike previous studies, our findings show that the time-varying slopes in frontier markets follow a random-walk process.

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More information

Accepted/In Press date: 7 February 2023
e-pub ahead of print date: 10 February 2023
Published date: 1 May 2023
Additional Information: Publisher Copyright: © 2023 Elsevier Inc.
Keywords: Asset pricing, Fama and French, cost of equity, frontier markets, industry, Industry, Cost of equity, Frontier markets

Identifiers

Local EPrints ID: 475605
URI: http://eprints.soton.ac.uk/id/eprint/475605
ISSN: 1057-5219
PURE UUID: 45d82988-2353-4636-af26-3d588fd6ac79
ORCID for Frank McGroarty: ORCID iD orcid.org/0000-0003-2962-0927

Catalogue record

Date deposited: 22 Mar 2023 17:38
Last modified: 17 Mar 2024 02:57

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Contributors

Author: Alya Hourani
Author: Yan Wang
Author: Sercan Demiralay
Author: Frank McGroarty ORCID iD

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