Risk Premium for Emerging Market Equities Versus Developed Market Equities

Abstract

The paper provides the most recent view on the difference in ERP (Equity Risk Premiums) across various economic regions, analyzing data sets from the early 2000s to May 2023. The study demonstrates a significant shift in the relationship between ERPs in emerging and developed markets over the past two decades, which runs contrary to the existing research on the matter. The author estimated the average ERPs per country and economic region, analyzed ERPs on the industry level, and conducted the regression analysis using macroeconomic factors and analysis of upside and downside betas. The research established that, following the 2008 economic crisis, developed markets displayed greater resilience to negative economic shocks. Moreover, investing in emerging markets entails higher risks, characterized by elevated negative beta and higher volatility, but also increased upside beta. The regression analysis revealed negative associations between ERP and higher GDP growth and local interest rates, while a positive correlation emerged with a higher unemployment rate. Additionally, the paper incorporates the Democracy Index, indicating that less democratic countries tend to exhibit higher ERPs.