FINANCIAL LIBERALIZATION AND THE RISK-RETURN RELATIONSHIP: EVIDENCE FROM BRAZIL
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Tests of stock returns in developed and emerging markets indicate that several factors beyond the market portfolio are priced, a finding inconsistent with the predictions of the standard capital asset pricing model. To investigate the implications of financial liberalization for the pricing of risk factors, we conduct asset pricing tests using firm-livdl data in Brazil before and after liberalization. Subsequent to liberalization, several firm-specific attributes are priced differently. In particular, we find that the premium for small firms is greater in the post-liberalization period, consistent with an increase in foreigner investors who prefer large, highly visible firms.
Abstract
Tests of stock returns in developed and emerging markets indicate that several factors beyond the market portfolio are priced, a finding inconsistent with the predictions of the standard capital asset pricing model. To investigate the implications of financial liberalization for the pricing of risk factors, we conduct asset pricing tests using firm-livdl data in Brazil before and after liberalization. Subsequent to liberalization, several firm-specific attributes are priced differently. In particular, we find that the premium for small firms is greater in the post-liberalization period, consistent with an increase in foreigner investors who prefer large, highly visible firms.