Association Between Environmental Factors and Equity Market Performance: Evidence from a Nonparametric Frontier Method

Abstract

In this cross-sectional study, equity market performance is assed in a multidimensional risk-adjusted return framework using a non-parametric procedure known as data envelopment analysis (DEA). In the DEA model, several risk measures are considered as input and average return is considered as output. Thereafter, adopting a censored regression procedure the association between equity market performance and a set of variables that proxies market characteristics and the political and the business environment in which the market operates is investigated. The aim here is to contribute to the literature on the association between environmental factors and equity market performance using a methodology that has not been used in such investigations previously. The results reveal that developed market performance is associated with the size of the market and in the case of emerging markets the friendliness of the business environment seem to matter. Even though the equity market performance appears to be associated with purchasing power parity the direction of association is contrary to what is hypothesised. When developed and emerging markets are pooled, both size and business environment appear as significant explanatory variables of performance.