Research pick: Risk in emerging markets – for beta or for worse - "Towards a deeper comprehension of unlevered betas in emerging markets: Gordon and a regression stock valuation model"

Research in the International Journal of Economic Policy in Emerging Economies has tackled the difficult issue of calculating the financial risk associated with a company in an emerging market. Conventional methods do not work well in this financial environment and produce biased results. The new work overcomes this by creating a standardized procedure to match two asset pricing models, enabling accurate calculations for specific industries in emerging markets of the so-called unlevered betas.

In financial jargon, the beta is a statistical measure of a company’s market risk. The unlevered beta or asset beta is a commonly used measurement of risk related to the beta that represents the company’s volatility in the market, which focuses on assets and ignores its debts.

The work of Pablo José Arana Barbier of the Pontificia Universidad Católica del Perú in Lima, Perú successfully demonstrates a new approach to calculating the unlevered beta risk. Barbier has identified several issues associated with measuring company risk in emerging countries. These include opportunity cost, negotiation liquidity, information availability, dividend payments, volatility, and investor sentiment.

Having identified these factors, Barbier’s approach offers a strong correlation that allows risk to be estimated through the market without introducing bias from indicators in developed markets as would be the norm elsewhere. Barbier also confirms that the Capital Asset Pricing Model (CAPM) is a suitable valuation measure but works best if inflationary pressures are excluded and any risk at the national level is ignored.

The empirical approach builds on earlier methods to calculate unlevered betas but allows companies in emerging markets to understand their risks using publicly available databases and financial information. Barbier concedes that there remains a need for further investigation to comprehend the specific factors that account for correlations between unlevered betas calculated through this graphical method and the proposed model. Indeed, the study suggests a potential role for earnings per share (EPS) and investor sentiment in explaining unlevered betas in emerging economies. EPS has previously been overlooked but may represent an important factor in emerging markets where greater value is associated with speculation and price differentials, a value that might even outweigh dividend payments.

Arana Barbier, P.J. (2023) ‘Towards a deeper comprehension of unlevered betas in emerging markets: Gordon and a regression stock valuation model’, Int. J. Economic Policy in Emerging Economies, Vol. 17, No. 4, pp.586–599.