Risk Exposures in the Asian Emerging Markets

Asian emerging markets have experienced both market liberalization and financial crisis. During the periods covering these two events, I show that the existing asset pricing models are unable to fully capture the risk in the small size, large size, glamour and value portfolios. I hypothesize that these two events changed the degree of market integration, thus varying the risk exposures in portfolios through time. To test the hypothesis, this paper provides a conditional regime-switching model which is able to account for the risk exposures change with respect to different levels of market integration. The two regimes assume that portfolios should be priced globally under completely integrated markets but are priced locally under completely segmented markets. In addition, I incorporate a time-varying integration measure into the model because it allows us to describe the returns variation in partially segmented markets. I find that during pre-liberalization and post-crisis periods, the portfolios’ risk exposures can be attributed more to local risk factors than global ones, while during the periods between