A Modified CAPM Valuation Model for Latin American Emerging Markets

Resumen

This paper analyses the systematic risk factors associated to long-term investments in Latin American Emerging Markets in order to estimate the discount rate to be used by an investor localized in a developed market. In order to do so, we review the main valuation approaches based on the CAPM model, focusing in the foreign exchange risk. Due to the high correlation between the emerging markets stock indices, and also to the stochastic nature of the exchange risk, we proposed a modified version of the CAPM that explicitly includes a foreign exchange risk premium in the discount rate. The empirical comparison of the proposed model using 43 stocks included in the stock markets indexes from Brazil, Chile and Mexico, we find that the proposed model outperforms another well-known model by showing a lower prediction error as measured by MAPE, RMSE and U-Theil scores.