In order to fill a gap in the research on developing equity markets, especially emerging markets, this study deals with market anomalies in the BRIC countries, specifically focusing on identifying the anomalies size and price-to-book effect.
However, the reason for an analysis regarding stock market anomalies in the BRIC countries is not exclusively limited to the lack of contemporary studies on this topic. The emerging markets in general, and, specifically, the BRIC stock markets are very interesting and valuable objects for respective examinations, since they still provide an enormous growth potential. The markets naturally show a high volatility.
This study’s approach is to explain the established market anomalies and point at factors, which may enforce size and price-to-book effects in each BRIC country. Therefore, after presenting the BRIC concept in chapter 2, the standard method to estimate the stock return, the Capital
Asset Pricing Model (CAPM), is introduced in chapter 3 in order to identify possible weaknesses and certain anomalies, which have been identified in the research. The most common anomalies will be introduced in chapter 4. Subsequently, an alternative method to explain the stock return, the Fama / French three-factor model is discussed as a possibility to identify further risk factors, which can invalidate anomalies with respect to the CAPM, in chapter 5. Furthermore, a brief overview on previous studies, which include valuation anomalies in the respective countries, is given in chapter 6. In the empirical part of chapter 7, each country is analyzed individually with respect to size and price-to-book effects. However, the study applies the same empirical analysis for each stock market in order to obtain comparable results, choosing a timespan, which covers the maximum period for which sufficient data is available in all stock markets. Two approaches are used per country. The first, to identify the mentioned stock market anomalies, the second to explain the cross-section of stock returns by means of three proxies for risk, namely systematic risk in form of CAPM-beta, size and book-to-market equity ratio. The empirical part of this examination investigates the time frame from January 1996 until June 2015 and uses a total sample of 6,054 stocks throughout the four stock markets. In the conclusion, the study’s results are summarized and findings presented.
Table of Contents
1 Introduction
2 The BRIC Concept
2.1 Introducing the BRIC Countries
2.2 Heterogeneous Conditions
2.3 Volatility of the Investors’ Interest in the BRIC Markets
3 Theoretical Background of Stock Market Anomalies
3.1 Stock Market Anomalies – Definition
3.2 Capital Market Model – CAPM
3.2.1 The Model
3.2.2 Theory of Efficient Markets
3.2.3 Criticism of the CAPM
3.3 Conditions for Anomalies in the BRIC Countries
3.3.1 Market Efficiency in the BRIC Countries
3.3.2 Brazil
3.3.3 Russia
3.3.4 India
3.3.5 China
3.3.6 Hypothesis
4 Stock Market Anomalies
4.1 Valuation Anomalies
4.1.1 Size Effect
4.1.2 Price-to-Book Effect / Book-to-Market Effect
4.1.3 Price-Earnings-Ratio Effect
4.2 Calendar Anomalies
4.2.1 January Effect and Weekend Effect
5 Can further Risk Factors Invalidate Valuation Anomalies?
5.1 Fama and French’s Multi-Factor Model – Approach
5.2 Fama and French’s Three-Factor Model
6 Research Overview – Valuation Anomalies in the BRIC Countries
6.1 Brazil
6.2 Russia
6.3 India
6.4 China
7 Size and Price-to-Book Effect Analysis
7.1 Data and Methodology
7.1.1 Data
7.1.2 Methodology
7.2 Examination of the Brazilian Stock Market
7.2.1 The Brazilian Sample
7.2.2 Empirical Evidence for the Brazilian Stock Market
7.3 Examination of the Russian Stock Market
7.3.1 The Russian Sample
7.3.2 Empirical Evidence for the Russian Stock Market
7.4 Examination of the Indian Stock Market
7.4.1 The Indian Sample
7.4.2 Empirical Evidence for the Indian Stock Market
7.5 Examination of the Chinese Stock Market
7.5.1 The Chinese Sample
7.5.2 Empirical Evidence for the Chinese Stock Market
7.6 Discussion
8 Conclusion
Objectives & Core Themes
This thesis examines the existence and validity of market anomalies—specifically the size effect and the price-to-book (book-to-market) effect—within the BRIC (Brazil, Russia, India, China) equity markets. The primary research goal is to determine if these anomalies persist in emerging markets and whether they can be explained by risk factors captured in the Fama and French three-factor model, or if they point toward underlying market inefficiencies.
- Analysis of the BRIC concept and economic heterogeneity.
- Theoretical evaluation of stock market anomalies and the Capital Asset Pricing Model (CAPM).
- Empirical examination of size and price-to-book effects across BRIC stock markets using data from 1996 to 2015.
- Investigation of Fama and French’s three-factor model as a method to invalidate CAPM anomalies.
- Discussion on data limitations and the impact of structural market conditions on anomaly persistence.
Excerpt from the Book
4.1.1 Size Effect
The size effect denominates the significant negative correlation between stock return and market capitalization, after adjusting for the systematic risk, defined by the CAPM. For small companies with low amounts of market capitalization, the number of shares outstanding (NOSH) times stock price, a significantly higher stock return on average can be reported than for companies with a high market capitalization.47
The first to publish a survey on this specific phenomenon was Banz (1981). He found evidence that stock return and respective market capitalization are strongly correlated. Thus, he performed cross-sectional regressions of stock portfolio returns on the stock portfolio’s market capitalizations. The portfolios were determined annually on the basis of market capitalization and CAPM beta. According to his findings, in the four decades from 1936 until 1977, small NYSE firms had, on average, significantly larger risk-adjusted returns than large NYSE firms.48
The second important paper which most subsequent examinations that deal with the size effect, refer to, was published three years later by Reinganum (1983a). Compared to Banz (1980), he included stocks from the NYSE and the AMEX in his sample and scales the timeframe from 1963 until 1980. Reinganum created stock portfolios on an annual basis, using the end-of-the-year market capitalization decile in order to define the thresholds. Every resulting portfolio consisted of ten percent of the total number of the stocks listed at NYSE and AMEX. For the subsequent year, the portfolios stayed unmodified, and so the equally weighted annual returns could be obtained. Thus, portfolio returns for small to big firm portfolios were calculated annually, and the time series for each portfolio’s returns was averaged. By sorting portfolios from a low to a high average market value of the containing stocks, it became pronounced that the average portfolio return decreased with the average firm size.
Summary of Chapters
1 Introduction: Introduces the research gap regarding stock market anomalies in developing markets and outlines the study's focus on the BRIC nations.
2 The BRIC Concept: Provides background on the origin of the BRIC acronym and discusses the diverse economic conditions and growth potential of the four member states.
3 Theoretical Background of Stock Market Anomalies: Explains the CAPM, the efficient market hypothesis, and the theoretical definitions of market anomalies.
4 Stock Market Anomalies: Details common valuation and calendar anomalies observed in established markets, setting the stage for the empirical study.
5 Can further Risk Factors Invalidate Valuation Anomalies?: Introduces the Fama and French multi-factor framework as an alternative to the CAPM for explaining asset returns.
6 Research Overview – Valuation Anomalies in the BRIC Countries: Reviews existing empirical literature regarding size and book-to-market effects specifically within the BRIC countries.
7 Size and Price-to-Book Effect Analysis: Presents the primary empirical research methodology and individual country-specific results for Brazil, Russia, India, and China.
8 Conclusion: Synthesizes the findings of the empirical study and offers final insights into the persistence of anomalies and the applicability of risk models in the BRIC markets.
Keywords
BRIC, Market Anomalies, Size Effect, Price-to-Book Effect, CAPM, Fama and French, Emerging Markets, Stock Returns, Market Efficiency, Beta, Valuation, Risk Factors, Financial Reform, Portfolio Management, Cross-Sectional Regression.
Frequently Asked Questions
What is the core focus of this thesis?
The research focuses on analyzing stock market anomalies, specifically the "size effect" and "price-to-book effect," within the emerging economies of Brazil, Russia, India, and China.
What are the primary themes covered in this research?
The thesis explores market efficiency, the limitations of the Capital Asset Pricing Model (CAPM), Fama and French's multi-factor models, and the unique economic conditions of the BRIC nations.
What is the primary objective of this study?
The objective is to determine if established anomalies from developed markets appear in BRIC markets and to test if these anomalies can be explained by additional risk factors instead of just market inefficiency.
Which methodology is employed for this research?
The study uses empirical portfolio construction and cross-sectional regression analysis, applying the Fama and French methodology to identify anomalies and measure the impact of systematic risk, size, and book-to-market ratios on stock returns.
What does the main body of the work cover?
The main body moves from theoretical foundations of market models and anomalies to a literature review of BRIC-specific studies, followed by a rigorous empirical section that tests market data from 1996 to 2015.
Which keywords characterize this work?
Key terms include BRIC, market anomalies, size effect, price-to-book effect, CAPM, Fama and French, emerging markets, market efficiency, and systematic risk.
How does the Russian stock market differ from others in the sample?
The Russian market is characterized as the least explored and exhibits significant structural challenges, such as high concentration and historical volatility, which necessitated specific adjustments in the data sample preparation.
What is the significance of the findings regarding the Chinese market?
The research indicates that the Chinese market shows the most significant evidence for both size and book-to-market anomalies among the BRIC countries, with company size acting as a strong risk proxy.
- Arbeit zitieren
- Julian Anschütz (Autor:in), 2016, Market Anomalies in the BRIC Countries. Stock Market Evidence for Size and Price-to-Book Effects, München, GRIN Verlag, https://www.grin.com/document/343037
