Research | Projects

LOCAL AND GLOBAL ASSET PRICING MODELS: THE CASE OF BRIC MARKETS

To overcome limitations in current approaches to local-global models, we will compute returns using a numeraire currency and add the relative exchange rate as an explicative factor. A further point where we will try differentiating is the risk analysis. To this end we adopt the point of view of a foreigner investor willing to invest in a BRIC country, thereafter testing if there is a relative premium for the invested assets: that is if, considering the exchange rate effects, there is an excess return moving from a standard equity investment to a BRIC investment. On a second step, we will compare the absolute performance with a measure of risk adjusted performance. To this end we propose a Sortino like measure, where the expected excess return of the BRIC investment (relative to a non-BRIC one) is scaled with a shortfall measure (semideviance). It bears mentioning that, to the best of our knowledge, there are no articles on the subject matter explicitly focusing on the BRIC area. Our preliminary results show that one size does not fit all and local models can perform in many instances better than a single integrates one. The relative movement of currencies involved can affect the result obtained and permit to improve models. We believe that, beyond theoretical insights, analysing the economies of such a broad area is by all means of paramount importance for both scholars and practitioners.