Value Premium in the United States Vis a Vis Other Countries Free Essay Example, 2000 words

Patro carried out a study of stock market liberalization in emerging markets and the impact upon the emerging market country fund premiums, share prices and the values of net assets. Based upon his analysis of the results when new country funds are listed in the international markets, he concluded that there was an 8.8% decrease in the value premiums of the old funds during the first four months after which the new funds were announced. Moreover, he found that while liberalization and the opening up of the markets have a positive impact on the net asset values, it does not have an effect on the value premiums. As the author points out in his study, this may be because while an economy is not yet opened up to international investors due to political restrictions, there is a greater element of risk involved in investment, therefore the securities are priced lower than they would be in a situation where risk-sharing takes place with world capital, consequently value premiums may be hig her and decline once these markets are opened up. Garza Gomez (2001) has undertaken a study of the correlation between the risk and market value of equity. We will write a custom essay sample on Value Premium in the United States Vis a Vis Other Countries or any topic specifically for you Only $17.96 $11.86/pageorder now He points out that the spread in returns between value stocks and growth stocks is very significant in the United States, both from a statistical and economic point of view and this trend is also noticed in other non-U. S. countries. He has also highlighted the views of experts that have suggested two major reasons for the value premium. The first of these is the risk proxy idea which has been supported by Fama and French through a three-factor model, which suggests that value stocks are riskier and therefore higher returns will be required. On this basis, the market value of equity (MVE) and the ratio of book value to a market value of equity is the proxies for two risk factors. The other school of thought is that mooted by Lakonishok, Shleifer and Vishny whereby the pattern of investing as practiced by institutional investors tends to focus on the short term potential of the stocks through recent activity in the market rather than making a predict ion about potential long term price of the stocks.