Abstract This paper explores risk and return relations in six Asian equity markets affected by the 1997 Asian financial crisis. After the start of the crisis, national equity betas increased and average returns fell substantially. Beta increases due to leverage linked to exchange rates. The increase in expected return needed to accompany this rise in beta is made possible through the creation of capital losses that lower average returns. We propose a new probability-based asset pricing model that captures leverage effects using valuation ratios. Results show the role of leverage in explaining the likelihood of the financial crises. Crosssectional evidence supports time-series findings.

This paper proposes asymmetric GARCH-Jump models that synthesize autoregressive jump intensities and volatility feedback in the jump component. Our results indicate that these models provide a better fit for the dynamics of the equity returns in the US and emerging Asian markets, irrespective whether the volatility feedback is generated through a common GARCH multiplier or a separate measure of volatility in the jump intensity function. We also find that they can capture several distinguishing features of the return dynamics in emerging markets, such as, more volatility persistence, less leverage effects, fatter tails, and greater contribution and variability of the jump component.