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Exploring return on equity for stock markets worldwide

An EU initiative looked into the link between expected equity market returns and extreme returns for stock markets around the world. Outcomes will have an impact on international risk management, portfolio distribution and security pricing in the post-global financial crisis era.
Exploring return on equity for stock markets worldwide
Thanks to EU funding, the EXTRETEXPRET (Extreme returns and expected returns in international stock markets) project set out to gather data on firms and markets from over 50 countries concerning equity returns and possible determinants of stock market movements.

Project partners used advanced econometric methods to analyse whether extreme returns are contributing factors in stock market returns. In the first phase of the project they examined the relationship between downside risk and expected returns on the global aggregate stock market. Main results showed the importance of downside risk in deciding index returns and that the relationship is weaker for developed markets.

The second phase also focused on downside risk by analysing whether the equity indices of 24 emerging and 28 developed markets reward their investors evenly after considering risk.

In addition, the team investigated the predictive power of reward-to-risk ratios for expected market returns. A ranking of the 52 markets according to their alternative reward-to-risk ratios revealed that countries with emerging markets had much higher ratios than those with developed markets. The analysis also showed a very positive link between different reward-to-risk metrics and expected market returns.

EXTRETEXPRET demonstrated how key downside risk is for equity returns, particularly for emerging markets. It also provided evidence for such markets and how they have traditionally rewarded investors after adjusting for risk. Results will have important implications for the investment behaviour of financial market players.

Related information


Equity, stock markets, market returns, extreme returns, downside risk, reward-to-risk ratios
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