Industry costs of equity: evidence from frontier markets

Hourani, A., Wang, Y. ORCID: 0000-0001-5438-4255, Demiralay, S. ORCID: 0000-0003-2543-7914 and McGroarty, F., 2023. Industry costs of equity: evidence from frontier markets. International Review of Financial Analysis, 87: 102573. ISSN 1057-5219

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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. Consequently, the rolling regression of the five models could be of interest to fund managers and regulators.

Item Type: Journal article
Publication Title: International Review of Financial Analysis
Creators: Hourani, A., Wang, Y., Demiralay, S. and McGroarty, F.
Publisher: Elsevier BV
Date: May 2023
Volume: 87
ISSN: 1057-5219
Divisions: Schools > Nottingham Business School
Record created by: Laura Ward
Date Added: 22 Feb 2023 08:57
Last Modified: 22 Feb 2023 08:57

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