Is There a Free Lunch in Emerging Market Equities?
Posted: 15 Aug 1998
Date Written: March 1998
In the early 1990s, a number of papers began to appear in the academic and practitioners journals billing investments in emerging markets as a "free lunch." It was argued that emerging equity markets reduce risk and increase expected returns, rendering significant diversification benefits for globally-minded investors. Because these studies typically reflect the performance of direct investment in emerging market indices, the "free lunch"-doctrine may be less relevant for many investors. In this paper, we focus on the benefits from holding closed-end mutual funds, open-end mutual funds and ADRs. Using mean-variance spanning tests, we find that the direct exposure to emerging market indexes almost always gives benefits at least as strong as those from managed funds or ADR portfolios. Open-end funds track the indexes much better than either closed-end funds or ADR-portfolios.
JEL Classification: G12, G11, F21
Suggested Citation: Suggested Citation