Download or read book Can Investor Heterogeneity be Used to Explain the Cross-Section of Average Stock Returns in Emerging Markets? written by Chan Shik Jung and published by . This book was released on 2010 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines whether investor heterogeneity can be used for asset-pricing purposes in emerging markets. We pose this question, since the lack of transparency and greater uncertainty, which are typical of those markets, render it more likely that investors will disagree with each other and hold different portfolios, resulting in a mean-variance inefficient market portfolio. Consequently, we examine whether a heterogeneity-based factor can sufficiently augment the market portfolio, so that the two can function as multivariate proxies for the tangency portfolio. We test this hypothesis in the Korean stock market in which the measures of heterogeneity such as foreign ownership and institutional holdings are available for a large number of stocks over an extended period of time. We find that the heterogeneity-augmented two-factor model outperforms the CAPM one-factor and the Fama-French three-factor models. Consistent with the greater severity of investor heterogeneity in emerging markets, a developed market with comparable data availability, namely, Japan, shows similar but weaker test results.