Emerging countries stock markets: An analysis using an extension of the three-factor CAPM

Mario Innocent D'Souza, Fordham University


The stock markets of India and South Korea became partially liberalized in 1992. Has this liberalization led to stock market efficiency? The overall goal of this paper is to test if the stock markets in these two countries have become truly informationally efficient in the Fama sense. A subordinate goal is to see if the patterns of returns seen in the US and what the theory suggests should be, is seen in the stock markets of South Korea and India. In order to meet these goals we use an extended version of the Fama and French three-factor CAPM. The Fama and French model has three factors to price the common risks associated with common stocks. The three risks which these factors price are the market risk, the common risk associated with the market capitalization of the firms, and the common risk associated with the Book Value to Market Value ratio of the firm. Our model introduces a fourth factor, which capture the risk associated with the time-varying conditional variance of the stock returns. We introduce this fourth factor because there is growing evidence that the stock returns typically exhibit phases of relative tranquillity followed by periods of high volatility. The results show that the stock market in South Korea was informationally efficient but the stock market in India was not. The results were mixed as far as patterns of returns were concerned for both South Korea and India; that is, some of the patterns of returns were what the theory suggested while some were not.

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Recommended Citation

D'Souza, Mario Innocent, "Emerging countries stock markets: An analysis using an extension of the three-factor CAPM" (2002). ETD Collection for Fordham University. AAI3037214.