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This paper examines whether investor heterogeneity can be used for asset-pricing purposes in emerging markets. The authors pose this question, since the lack of transparency and greater uncertainty, which are typical of those markets, render it more likely that investors will disagree with each other and hold different portfolios, resulting in a mean-variance inefficient market portfolio. Consequently, the authors examine whether a heterogeneity-based factor can sufficiently augment the market portfolio, so that the two can function as multivariate proxies for the tangency portfolio. The authors test this hypothesis in the Korean stock market in which the measures of heterogeneity such as foreign ownership and institutional holdings are available for a large number of stocks over an extended period of time.
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