## Institutional Investors and Asset Pricing in Emerging Markets

_IMF Working Papers, January 1, 1996_

## Source details

**Canonical URL:** [Institutional Investors and Asset Pricing in Emerging Markets](https://www.imf.org/en/publications/wp/issues/2016/12/30/institutional-investors-and-asset-pricing-in-emerging-markets-1972)

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## Bibliographic details
- Authors: Elaine Karen Buckberg
- Published: January 1, 1996
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451841718.001

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### Summary and central finding
- 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.

### Methodology and model comparison
- The paper contrasts:
  - One-factor CAPM (global market portfolio alone).
  - Two-factor asset pricing model (broad emerging markets portfolio plus the global market portfolio).
- The two-step investor behavior (first choose allocation to developing-country assets, then allocate across emerging markets) motivates the two-factor specification.

### Implications for asset pricing in emerging markets
- 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.

### Subject areas and keywords (as listed)
- 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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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/institutional-investors-and-asset-pricing-in-emerging-markets-1972_