The cost of equity beyond CAPM: Evidence from Latin American Stocks (1986-2004)

GRANDES, MARTÍN; PANIGO, DEMIAN TUPAC; PASQUINI, RICARDO

Serie Documentos de Trabajo

CEF-Argentina

Lugar: Buenos Aires; Año: 2007 vol. 17 p. 1 - 49

In this paper we make two contributions to the empirical literature on asset pricing in emerging markets. First, we test the Fama and French three-factor model for a sample of 921 Latin American stocks over 1986-2004. Second, we elaborate a methodology to estimate the impact of firm-idiosyncratic variables on the excess returns not accounted for by CAPM. This methodology deals with potential estimator bias, non linearities and endogeneity problems usually found in the literature. Our main findings suggest that Fama and French factors (size and value premia) do not add significant explanatory power to CAPM regressions of Latin American stock (excess) returns, and that only to a limited extent are the market price-to-book value ratio, size and leverage significant determinants of these returns