Financial Risk and Profitability in Frontier and Emerging Markets: Panel Evidence from the Palestinian and Turkish Stock Exchanges

Abstract

This paper examines whether the association between financial risk and firm profitability differs between a frontier and an emerging market, using panel data from the Palestinian Stock Exchange (PEX) and Borsa Istanbul (BIST), 2010–2024. Return on assets (ROA) is the preferred outcome, since earnings per share is not directly comparable across the two markets’ currencies and inflation regimes; EPS is retained as a secondary outcome. Earnings volatility is measured as the rolling standard deviation of EBIT divided by total assets. A Hausman test favors firm and year fixed effects over random effects, the preferred specification throughout. The central specification tests whether the earnings-volatility-profitability association differs between the two markets. Earnings volatility is positively associated with profitability in both markets, but the association is significantly weaker in the frontier market, an attenuation rather than a reversal of sign. This is consistent with, though it does not establish, the hypothesis that limited risk-absorption capacity in frontier markets may weaken this link. The pattern holds across alternative volatility windows and outcome variables, though not under the shortest window tested. Variance inflation factors are assessed using the conventional threshold of 10. The analysis is descriptive; no causal claim is made.