Scandinavian Working Papers in Economics

Ratio Working Papers,
The Ratio Institute

No 174: The Cost of Insecure Property Rights: R2 Revisited

Per-Olof Bjuggren () and Johan E Eklund ()
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Per-Olof Bjuggren: The Ratio Institute and Jönköping International Business School, Postal: The Ratio Institute, P.O. Box 3203, SE-103 64 Stockholm, Sweden
Johan E Eklund: The Ratio Institute and Jönköping International Business School, Postal: The Ratio Institute, P.O. Box 3203, SE-103 64 Stockholm, Sweden

Abstract: In the conventional CAPM model only a single risk factor is considered. However, using a world market portfolio to estimate systematic risk in national portfolios little of the required rate of return is explained in developing as compared to developed countries. Adding a factor representing institutional risk the predictive power increases substantially. By stressing importance of property and investor rights in this fashion, we add to the research on international differences in R2 initiated by Morck et al. (2000). Our findings are consistent with the hypothesis that stock price synchronicy depends on the institutional quality.

Keywords: Asset pricing; International financial markets; Property rights; Financial economics

JEL-codes: G12; G15; G38; N20

29 pages, September 6, 2011

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