Valuation and Lab 202410
Professor: Magdalena Barreiro, Ph.D
Betas in Developed and Emerging Markets
The market beta, which measures the sensitivity of a stock or portfolio's returns to the returns of
the overall market, can differ between developed and emerging markets due to several factors:
1. Market Volatility: Emerging markets tend to be more volatile than developed markets
due to political instability, economic uncertainties, and less mature financial systems.
This increased volatility can lead to a higher beta in emerging markets, indicating that
securities in these markets are more sensitive to market movements.
2. Liquidity: Developed markets typically have more liquid markets compared to emerging
markets. The lower liquidity in emerging markets can lead to greater price fluctuations,
affecting the beta. Illiquid markets may see more pronounced movements in response to
market news, which can cause higher betas.
3. Market Integration: Developed markets are often more integrated with the global
financial system, leading to lower systemic risks. In contrast, emerging markets might be
less integrated, with unique local risks that could increase their market beta.
4. Economic Stability: Developed markets generally have more stable economic
environments with established regulatory frameworks, reducing uncertainty and market
risk. In emerging markets, economic instability, regulatory changes, and other country-
specific risks can increase market beta.
5. Diversification and Sector Composition: The sector composition of markets can also
play a role. Emerging markets might be more concentrated in specific sectors, such as
commodities or manufacturing, which can be more sensitive to global economic cycles,
leading to higher betas. Developed markets, with more diversified economies, might
exhibit lower betas.
These factors collectively contribute to why the market beta from a developed market might
differ from that of an emerging market.
NOTE: BETA is a statistical measure that needs continuous price information for a market
index and for the particular firm to make it possible its estimation. That information is not
available in many emerging markets, and is certainly not available in Ecuador which is not even
an emerging market
When using an international beta for a domestic calculation, market integration and industry
diversification are the most important factors causing differences. This is why, two industries
that have different structures in each country will make it unreliable to use an international beta.
One clear example is the textile industry that in the US has very different characteristics from the
same industry in Ecuador
