Are country and size risks priced in the Brazilian stock market?

Resumo

When estimating a firm's cost of equity for valuation and other purposes in emerging markets without (or with only partial) capital market integration, many practitioners include a premium for country risk. In principle, the inclusion of such a risk factor would be justified if the particular country of interest was not sufficiently integrated into the global capital market. Initially, the paper measures and tests the degree of integration for the Brazilian market and does not reject the hypothesis of integration. The paper then tests directly the relevance of country risk premium in individual stocks' expected returns in the Brazilian market. Monthly data for the stocks of 57 of the most actively traded, non-financial firms, over the 2004 to 2014 period are used, using EMBI (Emerging Markets Bond Index) as a proxy for country risk, and this is found not to be significant. Finally, a premium for the size factor, also commonly used by practitioners, is also tested. Although it is found to be significant, the premium is negative, in contrast with current practice, which entails the addition of a positive premium to the required returns on small stocks. The inclusion of both a country risk and a size premium, in addition to the market portfolio risk premium, corresponds to the use of the Goldman Sachs model, as proposed by Mariscal and Lee (1993).

Ficha do documento

Tipo

Artigo científico

Ano

2017

Instituição

ANPAD - Associação Nacional de Pós-Graduação e Pesquisa em Administração

Fonte

Repositório da FGV

Idioma

Inglês

Acesso

Acesso aberto

DOI

10.1590/1807-7692bar2017160076

Identificador

oai:repositorio.fgv.br:10438/20920

Temas

Economia

Palavras-chave

Capital market integrationCountry riskSize riskSystematic riskEconomiaMercado de capitaisRisco (Economia)