Value Premium and Country Risk as Conditional Risk Factors in Major Latin American Markets

Asset pricing is a widely explored theme in the financial literature. Nevertheless, the value premium phenomenon remains controversial because although it is easily detected in developed and emerging markets, little is actually known about the economic forces that explain its existence. In this context, this article aims to identify the value premium in major Latin American markets, as well as to determine whether the country risk could be considered an additional risk factor for conditional returns in the region that is not yet captured by the value premium. To this end, a model containing five factors, developed by adding the country risk factor to the model presented by Carhart (1997 Carhart, M. M. (1997). On persistence in mutual fund performance. Journal of Finance, 52(1), 57–82. doi:10.1111/j.1540–6261.1997.tb03808.x[Crossref], [Web of Science ®] , [Google Scholar]), was proposed. The statistical procedure adopted was that of Fama and French (1993 Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33(1), 3–56. doi:10.1016/0304–405x(93)90023–5[Crossref], [Web of Science ®] , [Google Scholar]) for the period between 1994 and 2012 Fama, E. F., & French, K. R. (2012). Size, value, and momentum in international stock returns. Journal of Financial Economics, 105(3), 457–472. doi:10.1016/j.jfineco.2012.05.011[Crossref], [Web of Science ®] , [Google Scholar], and the data used were those from nonfinancial companies listed on the stock exchanges of Argentina, Brazil, Chile, and Mexico. We confirmed the existence of the value premium in three of the four markets analyzed: Argentina, Brazil, and Chile. The country risk and the value premium were significant factors in explaining conditional returns in only one of these countries, Brazil.