Abstract

Asian emerging markets have experienced market liberalization and the 1997 financial crisis. In this paper, I examine if small size, large size, glamour and value portfolios should be priced differently with the occurrence of these two events. Market liberalization and the 1997 financial crisis are hypothesized to change the level of market integration, thus varying the risk exposures in pricing models. I show that Fama and French's three factor model has better performance in either pre-liberalization or post-crisis periods than in post-liberalization periods. This finding suggests that we should add more global risk factors during post-liberalization periods to capture the impacts of change in market integration.

The second chapter provides the literature about general types of cross-sectional anomalies and models used in developed countries to explain the anomalies. Due to the time-varying returns of the emerging markets which is different from the developed markets, we postulate that it is problematic if we use traditional factor model to measure the risk exposure of the anomalies in the emerging markets. We characterize that candidates of risk attributes for the emerging markets can be grouped related to: country's credit risk, macroeconomic risk, market integration, persistence and fundamental valuation measures.

In the third chapter, I hypothesize that market liberalization and the 1997 financial crisis changed the degree of market integration, thus varying the risk exposures in small, large, glamour and value portfolios in the Asian emerging markets through time. To test the hypothesis, this chapter provides a conditional regime-switching model which is able to account for the risk exposures change with respect to different levels of market integration. I find that during pre-liberalization and post-crisis periods, the portfolios' risk exposures can be attributed more to local risk factors than to global ones, while during the periods between market liberalization and financial crisis, global factors weigh more heavily than local ones. My results suggest Asian emerging markets became more integrated with global capital markets after market liberalization but then turned relatively segmented after the financial crisis.