Empirical Evidence of the Existence of Investable Premiums in Emerging Market Investable Stocks. Girard (2010)

The authors set out to explore the investability premium (i.e., a premium earned on stocks in countries where foreigners can more easily invest in them) in emerging market countries.  The thought is that if the stocks in a country are more investable, then a premium will be required by foreign investors due to increased risk (e.g., currency risk, information asymmetry, government risk, etc.). 

They first create a regression that is composed of the market return, and the size, value, momentum and investability premiums.  They find that for all the 29 countries in the 1988-2006 period, each of the premiums is statistically significant.  They find that on average, higher beta, large-cap, growth, past winners, and more investable companies tend to outperform lower beta, small-cap, value, past losers and less investable companies. 

Next, they split these regressions into upstate and downstate regimes.  They find the same conclusion for each of the regimes as was found overall, except for the market beta and the investable premium (both of which reverse sign).  So, in a downstate, less investable companies outperform more investable companies, and lower beta stocks outperform higher beta stocks.

Next, they create four regressions that start with the investability premium and adds the other factors sequentially.  In all cases, the market return is the most significant explainer of stock returns on average, followed by the investability premium.  Then, by splitting these regressions into "less investable" and "more "more investable" tiers, they find that the investable premium becomes more significant (and the other factors become less significant) as the level of investability of the companies increases.

Finally, the authors split the previous regression into two regimes (the 1988-1995 period and the 2000-2006 period).  They find the same results as the overall time period, where the market return and the investability premium are the primary determinants of market returns, and as the investability of the companies increases, the investability premium becomes more significant as an explainer of returns.

Girard, E. C. (2010). Empirical Evidence of the Existence of Investable Premiums in Emerging Market Investable Stocks. Financial Review, 45(4), 1025–1051.