Comparative Study of Determinants of Stock Returns in Developed and Emerging Asia-Pacific Economies

Abstract

This study presents a comparative analysis of the determinants of stock market returns across developed and emerging economies in the Asia-Pacific region, focusing on six representative countries: Singapore, Hong Kong, Pakistan, India, China, and Sri Lanka. Stock markets are pivotal to capital formation, investment efficiency, and financial stability. However, the drivers of stock returns vary markedly between mature markets with advanced institutions and emerging markets characterized by structural and institutional challenges. Drawing on Efficient Market Hypothesis (EMH), Institutional Theory, and Adaptive Market Hypothesis (AMH), this study examines how macroeconomic factors (foreign direct investment [FDI] inflows, exchange rate volatility, current account balance), market microstructure factors (liquidity, bid-ask spreads, institutional ownership), and global factors (geopolitical risks, commodity price fluctuations) influence stock returns. A rigorous panel data regression framework is employed, using both fixed effects and random effects models, with the Hausman test guiding model selection. Diagnostic tests for multicollinearity, heteroskedasticity, and cross-sectional dependence ensure robustness. The dataset covers the period 2003–2023 with quarterly observations, sourced from reputable databases including Bloomberg, IMF, and the World Bank. The findings reveal that emerging markets exhibit greater sensitivity to domestic macroeconomic variables and institutional factors, while developed markets respond more strongly to global economic trends and systemic shocks. FDI inflows and current account balances are significant positive drivers of stock returns, particularly in emerging markets. In contrast, exchange rate volatility exerts a stronger negative influence in these markets. Institutional ownership and liquidity are found to enhance market efficiency and stability. By addressing critical gaps in the literature, this research provides actionable insights for policymakers, institutional investors, and financial analysts. The study contributes to the design of region-specific investment strategies and policy interventions aimed at fostering market resilience, enhancing financial stability, and supporting sustainable economic growth across Asia-Pacific economies.