Following Roll [Roll, R., 1992. Industrial structure and comparative behaviour of international stock market indices. Journal of Finance 47, 3–42] and Heston and Rouwenhorst [Heston, S.L., Rouwenhorst, G.K., 1994. Does industrial structure explain the benefits of international diversification. Journal of Financial Economics 36, 3–27], researchers have decomposed stock returns into country and industry components. Evidence suggests that industry components have become more important in recent years, but the reasons for this are unclear. Existing research concentrated mainly on stock returns in industrial countries. In this paper we consider instead the decomposition of stock risks within emerging equity markets. We provide a rationale for this procedure and its relationship to return decompositions. The results provide new firm-specific evidence on the debate over country and industry components, their stability over time, and the implications for portfolio diversification.

This paper draws regulatory lessons for emerging stock markets from an empirical study of the relationship between transactions costs and share price volatility in the London Stock Exchange. We concentrate our analysis on direct pecuniary costs of trading, namely transactions taxes (stamp duty) and brokerage charges, which derive directly from regulation. In a novel contribution to the transactions cost literature, we identify stock market performance with various measures of market volatility, and distinguish among market volatility, fundamental volatility and excess volatility; we also propose some simple ways of identifying the separate impact of transactions costs on these volatility measures. Our findings suggest that changes in transactions costs have a significant and dependable effect on share price volatility but the sign of this effect depends critically on the concept of volatility being measured. Among the important lessons for emerging stock markets is that transactions costs are an important factor in share market volatility and the regulatory regime therefore needs to take account of the impact of regulation on such costs. This is particularly important for those emerging stock markets that rely on stamp duty or other transactions taxes as a regulatory tool.