Investing in Emerging Markets: A Black Swan Perspective

Abstract:     
Most investors agree that investing in emerging markets is risky, but not all of them agree on the best strategy to deal with this risk. Some investors view the high volatility of these markets as an opportunity to make large short-term profits and actively trade; others view it as a risk than can only be borne with a long-term perspective and passively hold their portfolios. The fact is, emerging markets are populated by black swans. These large, unpredictable swings have a massive impact on long-term performance and are concentrated in a negligible proportion of days. Therefore, predicting them successfully and consistently over time is virtually impossible. As a result, the black swan perspective suggests that investors in emerging markets should avoid engaging in futile market timing and follow instead a passive approach.

Number of Pages in PDF File: 10

Keywords: Black swans, outliers, normality, emerging markets, performance

JEL Classification: G11

working papers series