Risk vs return: A comparative analysis between a developed and an emerging stock market

• Autor(a) principal: Gouveia, João Filipe
• Data de Publicação: 2022
• Tipo de documento: Dissertação
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10071/26269
• topic: Emerging market; Risk-adjusted returns; Sharpe ratio; Volatilidade -- Volatility; Mercado emergente; Risco ajustado ao retorno

Emerging stock markets have presented several opportunities for international investors over the last decades. This thesis addresses the risk-adjusted returns of an emerging stock market by comparing its returns and volatility with a developed stock market. Using the United States and China as the representative markets, the dissertation explores the opportunities offered by the emerging market for international investors. Most of the previous literature focuses on the diversification benefits of emerging stock markets. In this study, I innovate by looking at these markets as an alternative investment rather than the diversification potential. To compare the risk-adjusted returns of the two markets I calculate the weekly Sharpe ratio for the S&P 500 and the SSE Composite for 18 years. I perform multiple linear regression, for both the emerging and the developed markets, to analyze the factors that affect the Sharpe ratio calculated. The empirical results confirm that the financial market characteristics, the macroeconomic factors, and the correlation/contagion impact the performance of both the emerging and the developed stock markets. Regarding the risk-adjusted returns, the results show that in the period studied, the index representative of the US market presents higher returns, lower volatility, and consequently a higher Sharpe ratio than the one for the Chinese market index. Such results suggest that the developed stock market offers higher and more sustained risk-adjusted returns in comparison to the emerging stock market.