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Variations in emerging-market equity premia: impact of financial architecture

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  • Raj Aggarwal
  • John Goodell

Abstract

This article examines a topic of much interest, the association of financial architecture and national equity premia for recent eight-year period from 15 emerging-market countries. Modeling simultaneously our estimate of the ex-ante equity premium as a dependent variable and our measure of financial architecture as an instrumental variable, we document that equity premia are larger in countries that have a more bank-oriented financial architecture, as well as greater control of corruption, more foreign access to capital, and higher spending on education. Smaller equity premia are associated with greater political stability, greater measures against self-dealing, higher market volatility and greater uncertainty avoidance. Given the importance of the ex-ante equity premium in long-term investment decisions, the anticipated demographic challenges and financial reform in most countries and recent increases in cross-border investment, there is much interest among bankers, managers and policy-makers in these results, documenting the determinants of cross-national variations in equity premia.

Suggested Citation

  • Raj Aggarwal & John Goodell, 2011. "Variations in emerging-market equity premia: impact of financial architecture," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 16(3), pages 313-330.
    • Handle: RePEc:taf:rjapxx:v:16:y:2011:i:3:p:313-330
    DOI: 10.1080/13547860.2011.589623
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    References listed on IDEAS

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    1. Kaufmann, Daniel & Kraay, Aart & Mastruzzi, Massimo, 2007. "Governance Matters VI: Aggregate and Individual Governance Indicators, 1996-2006," Policy Research Working Paper Series 4280, The World Bank.
    2. Mr. Abbas Mirakhor & Mr. S. Nuri Erbas, 2007. "The Equity Premium Puzzle, Ambiguity Aversion, and Institutional Quality," IMF Working Papers 2007/230, International Monetary Fund.
    3. Goetzmann, William N. & Ibbotson, Roger G., 2006. "The Equity Risk Premium: Essays and Explorations," OUP Catalogue, Oxford University Press, number 9780195148145.
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