International Investors' Exposure to Risk in Emerging Markets
Posted: 7 Nov 1998
We examine the empirical differences in emerging market betas taken across four major currencies (US dollars, sterling, yen, and German marks) where the betas considered are either mean-variance or mean-lower partial moment betas. The mean-variance betas are found to be statistically similar to lower partial-moment betas in the majority of cases, which suggests they are robust to the nonnormality in the data. The difference between the two betas has become less significant in recent years as the emerging markets have become more stable. Furthermore, evidence is presented that betas obtained from both risk measures and calculated from returns denominated in different currencies have the same ordinal association. This shows the primacy of local risk over foreign exchange risk. We conclude that international investors can continue to use the mean-variance beta in assessing risk in emerging markets, although investors should not give it a conventional equilibrium interpretation.
JEL Classification: G12, G15
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