How Large are the Benefits of Emerging Market Equities?

Abstract

We perform a comprehensive evaluation of the benefits of emerging market equities by extending previous research in four fundamental ways. The contribution of this study is that it 1) evaluates a more complete sample; 2) examines performance measures that account for asymmetric return distributions; 3) separates emerging markets by region; and 4) considers the influence that the market environment has on the benefits of emerging market investments. Our results suggest that previous research has understated the benefits associated with investing in emerging markets. We find that broad emerging market indices have relatively low downside risk, which results in Sortino ratios that are approximately twice that offered by developed markets. Furthermore, we find that Latin American countries are particularly beneficial in hedging against adverse conditions in U.S. financial markets. Overall, our findings indicate that emerging markets allow investors to achieve lower risk, higher returns, and expanded risk/return possibilities; especially during periods when developed world investors need diversification the most.

Keywords: emerging markets

JEL Classification: F21, G11, G15