Asset pricing models in emerging countries: A comparative analysis

The concept of a "rational investor" is a fundamental assumption in asset pricing theories, and it requires an understanding of the variables that influence financial markets and the ability to make investment decisions accordingly. Asset pricing models developed to meet this requirement provide investors with important information about how the market mechanism works and how it responds to various macro or microeconomic variables. In this sense, asset pricing models can be thought of as the compasses that investors use to make rational decisions. In the study, the stock markets of 13 countries included in the MSCI Emerging Markets Index and the emerging countries sample generated by combining the companies traded in these markets with two different methods were examined within the framework of asset pricing models. As part of the research, the monthly returns of the portfolios created according to the certain criteria for the period June 2011-December 2020 were tried to be explained using CAPM, FF3 factor model, FFC four factor model, Q factor model, FF5 factor model and FF6 factor model. The performance of these factor models in explaining the value-weighted returns of the portfolios constructed for each sample of countries and emerging markets is compared using the GRS F-statistics method. The findings of the study indicate that the factor models whose performance was tested were not mean-variance efficient in explaining the returns of the constructed portfolios. Furthermore, the best factor model for explaining portfolio returns differs depending on the countries included in the sample and the portfolio creation criteria. In addition to these results, it was found that the level of integration between countries is low, creating opportunities for international portfolio diversification. Finally, it was concluded that the efficient market hypothesis is not valid in most of the country samples considered in the study analysis.