{
  "title": "Institutional Investors and Asset Pricing in Emerging Markets",
  "publication": "IMF Working Papers, January 1, 1996",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/30/institutional-investors-and-asset-pricing-in-emerging-markets-1972",
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  "summary": "This paper presents a new theory of asset pricing intended to address why other developing country equity markets responded so strongly to the Mexican devaluation, while the world’s major stock markets were unmoved.",
  "sections": [
    {
      "heading": "Summary and central finding",
      "content": "- Presents a new theory of asset pricing to explain why other developing country equity markets responded strongly to the Mexican devaluation while the world’s major stock markets were unmoved.\n- Explains the phenomenon by positing a two-step portfolio allocation process: investors first determine what share of their portfolio to invest in developing countries, then allocate those funds across the emerging markets.\n- Empirical finding: For 12 of 13 markets studied, the one-factor CAPM is rejected in favor of a two-factor asset pricing model that includes both a broad emerging markets portfolio and the global market portfolio."
    },
    {
      "heading": "Methodology and model comparison",
      "content": "- The paper contrasts:\n  - One-factor CAPM (global market portfolio alone).\n  - Two-factor asset pricing model (broad emerging markets portfolio plus the global market portfolio).\n- The two-step investor behavior (first choose allocation to developing-country assets, then allocate across emerging markets) motivates the two-factor specification."
    },
    {
      "heading": "Implications for asset pricing in emerging markets",
      "content": "- A broad emerging markets portfolio can be a distinct risk factor from the global market portfolio when institutional investors follow a segmented two-step allocation.\n- Market reactions in developing countries to region-specific shocks (for example, the Mexican devaluation) can be amplified if institutional investor allocations to the developing-country tranche are reweighted before cross-country reallocations are performed."
    },
    {
      "heading": "Subject areas and keywords (as listed)",
      "content": "- Subjects: Asset allocation; Asset and liability management; Asset prices; Emerging and frontier financial markets; Financial institutions; Financial markets; Prices; Stock markets; Stocks.\n- Keywords: Asia and Pacific; Asset allocation; Asset prices; composite index; developing country equities; developing country market portfolio; Emerging and frontier financial markets; Global; institutional investor; Latin America portfolio return; portfolio; Stock markets; stock portfolio; Stocks; world portfolio; WP.\n\n---\n\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/30/institutional-investors-and-asset-pricing-in-emerging-markets-1972"
    }
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    "Authors: Elaine Karen Buckberg",
    "Published: January 1, 1996",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451841718.001",
    "Presents a new theory of asset pricing to explain why other developing country equity markets responded strongly to the Mexican devaluation while the world’s major stock markets were unmoved.",
    "Explains the phenomenon by positing a two-step portfolio allocation process: investors first determine what share of their portfolio to invest in developing countries, then allocate those funds across the emerging markets.",
    "Empirical finding: For 12 of 13 markets studied, the one-factor CAPM is rejected in favor of a two-factor asset pricing model that includes both a broad emerging markets portfolio and the global market portfolio.",
    "The paper contrasts:",
    "The two-step investor behavior (first choose allocation to developing-country assets, then allocate across emerging markets) motivates the two-factor specification.",
    "A broad emerging markets portfolio can be a distinct risk factor from the global market portfolio when institutional investors follow a segmented two-step allocation.",
    "Market reactions in developing countries to region-specific shocks (for example, the Mexican devaluation) can be amplified if institutional investor allocations to the developing-country tranche are reweighted before cross-country reallocations are performed.",
    "Subjects: Asset allocation; Asset and liability management; Asset prices; Emerging and frontier financial markets; Financial institutions; Financial markets; Prices; Stock markets; Stocks.",
    "Keywords: Asia and Pacific; Asset allocation; Asset prices; composite index; developing country equities; developing country market portfolio; Emerging and frontier financial markets; Global; institutional investor; Latin America portfolio return; portfolio; Stock markets; stock portfolio; Stocks; world portfolio; WP."
  ],
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