Factors Correlated with Equity Market Risk Premiums in Developed and Emerging Markets

Abstract

This paper re-examines how three theory-suggested factors affect equity returns – specified as risk-premiums – and how the results differ between developed and emerging markets. Traditional time series or cross-sectional regression procedures have yielded inconclusive evidence on maintained hypotheses about the determinants of equity premiums. However, on pooling observations, our estimated coefficients are much more accurate. Using panel data regression, we find that the risk premiums of developed appear to be affected by variation in the three factors within the equity markets of countries. In the emerging Asian markets, the risk premiums are affected more by the variation over time in at least one of the same three factors.