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.
Related content: Property Rights and the Cost of Capital
Bjuggren, P-O. & Eklund, J.E. (2011). The Cost of Insecure Property Rights: R2 Revisited. Ratio Working Paper No. 174.