Why Invest in Emerging Markets? The Role of Conditional Return Asymmetry

61 Pages Posted: 14 Feb 2011 Last revised: 11 Apr 2016

See all articles by Eric Ghysels

Eric Ghysels

University of North Carolina Kenan-Flagler Business School; University of North Carolina (UNC) at Chapel Hill - Department of Economics

Alberto Plazzi

Swiss Finance Institute; USI Lugano

Rossen I. Valkanov

University of California, San Diego (UCSD) - Rady School of Management

Date Written: April 11, 2016

Abstract

We propose a quantile-based measure of conditional skewness, particularly suitable for handling recalcitrant emerging market returns. The skewness of international stock market returns varies significantly across countries over time, and persists at long horizons. In emerging markets, skewness is mostly positive and idiosyncratic, and significantly relates to a country's financial and trade openness and balance of payments. In an international portfolio setting, return asymmetry leads to sizeable certainty-equivalent gains and increases the weight on emerging countries to about 30%. Investing in emerging markets seems to be about expectations of a higher upside than downside, consistent with recent theories.

Keywords: return asymmetry, international equity markets, portfolio allocation, skewness

JEL Classification: G11, G15, C22

Suggested Citation

Ghysels, Eric and Plazzi, Alberto and Valkanov, Rossen, Why Invest in Emerging Markets? The Role of Conditional Return Asymmetry (April 11, 2016). Journal of Finance, Forthcoming; Swiss Finance Institute Research Paper No. 11-06. Available at SSRN: https://ssrn.com/abstract=1761446 or http://dx.doi.org/10.2139/ssrn.1761446

Eric Ghysels

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Gardner Hall, CB 3305
Chapel Hill, NC 27599
United States
919-966-5325 (Phone)
919-966-4986 (Fax)

HOME PAGE: http://www.unc.edu/~eghysels/

Alberto Plazzi (Contact Author)

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

USI Lugano ( email )

Via Buffi 13
CH-6900 Lugano
Switzerland

HOME PAGE: http://www.people.usi.ch/plazzia/

Rossen Valkanov

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States
858-534-0898 (Phone)

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