Conditional Asset Pricing in Emerging Stock Markets

Stock returns in emerging markets are to some extent predictable onthe basis of proper instrument variables. We show that local informationis more important than global information to capture emergingstock market returns. This is an indication for at least partial segmentationof emerging stock markets. Our results further demonstrate thatpredictability can be explained by time-variation in economic riskpremiums. Instead of testing a traditional beta pricing model, we test afully conditional asset pricing model in a stochastic discount factor(SDF) framework. Our approach is highly flexible. Scaling a vector ofreturns incorporates conditioning information...