What drives volatile emerging stock market returns?

We investigate what drives highly volatile stock return variations in an emerging country stock market. By applying Vuolteenaho's [What drives firm-level stock returns? Journal of Finance 57 (2002), 233-264] log book-to-market model to the Korean stock market, we find that at the individual stock level, cash-flow news contributes to stock return variation more than expected-return news does. However, at the aggregate market level, expected-return news dominates stock return variation. This is because the expected-return news has a substantial common element, whereas cash-flow news is largely firm-specific and thus diversifiable. Our finding suggests that the conventional wisdom that cash-flow news is firm-specific and expected-return news is market-wide is valid for emerging countries with volatile stock returns.