Thesis (DBA) - Cyprus International University. Institute of Graduate Studies and Research Business Administration

Understanding emerging market stock returns is crucial due to the unique risk-return profiles and growth opportunities these markets offer, which are distinctly different from those in developed economies. This study provides valuable insights for global investors and aids in developing tailored investment strategies in emerging economies. The thesis investigates the impact of news-based policy uncertainty measures on the cross-section of average stock returns in emerging markets. The study aims to determine whether these policy uncertainty measures provide additional explanatory power beyond the well-established risk factors proposed by Fama and French. Specifically, we control for the five Fama-French risk factors: market risk, size, value, profitability, and investment. Our empirical analysis involves analysing portfolios based on firm characteristics such as size, book-to-market ratio, profitability, and investment. Then the contribution of policy uncertainty measures to the average returns of these portfolios is assed. The findings indicate that the policy uncertainty factors are redundant and do not significantly influence the average returns when the five Fama-French risk factors are taken into account. Furthermore, the inclusion of policy uncertainty factors does not enhance the statistical or economic performance of the Fama-French five-factor model. This suggests that the information content of news-based policy uncertainty measures is already captured by the existing Fama-French risk factors. Our results hold across different specifications and robustness checks, including alternative test statistics and various definitions of policy uncertainty factors. The thesis contributes to the understanding of risk factors in emerging markets by demonstrating that news-based policy uncertainty measures do not offer additional explanatory power for average stock returns beyond the established Fama-French factors. This research has important implications for portfolio management and stock pricing models, highlighting the need to consider the redundancy of certain risk factors in the presence of comprehensive models like the Fama-French five-factor model.