Factors Affecting Risk-Adjusted Stock Market Returns in Emerging Markets: A Pre- and Post-Crisis Comparison

Sammanfattning: Emerging markets have shown higher average returns alongside higher volatility. This has attracted investors around the globe who see these markets as a precious alternative to developed ones, as has become clear in the aftermath of the financial crisis. Hence, we consider it logical that more emphasis be put on investigating not only stock market returns in these developing economies, but also their relationship with risk. In this paper, we investigate the explanatory power of various macro and microeconomic variables on risk-adjusted returns, measured by the Sharpe ratio. Our results suggest that a number of variables, macro and micro, have statistical power in at least one of our periods. We are particularly interested in the effect of the increase in capital flows to emerging markets on their equity markets. For this reason, focus is placed on the change in the explanatory power of our model when applied to the pre- vs. post-crisis periods. We find that the model is significantly better when applied to the post-crisis period with a more important role played by the exchange rate at the expense of the other variables.