Time Diversification in Developed and Emerging Markets

Abstract:     
Time in the market substantially reduces the risk of loss resulting from holding both stocks and bonds. By focusing on a downside VaR risk proxy in 25 emerging and 24 developed markets we show that the downside risk of both stocks and bonds is greatly reduced as the investment horizon is increased beyond 10 years, but the risk reduction is more pronounced in stocks. We also show that emerging markets have substantially greater downside risk than developed markets. The results suggest that investors should be very aware of their investment horizon when making asset allocation decisions, particularly into stocks in emerging markets.

Keywords: stocks, bonds, value at risk, VaR, investment horizon, time diversification, time in the market, emerging markets

JEL Classifications: G14, G15

Working Paper Series