Structural Breaks and Portfolio Performance in Global Equity Markets

Quantitative Finance, Vol. 15, No. 6, June 2015, pp. 909-922.

14 Pages Posted: 24 May 2015

See all articles by Harry J. Turtle

Harry J. Turtle

Colorado State University, Fort Collins - Department of Finance & Real Estate

Chengping Zhang

George Fox University

Date Written: 2015

Abstract

We find two structural breaks, signifying three investment regimes, in global equity markets from January 1988 through January 2010. These estimated breaks are similar for multiple models of beta risk. We find that emerging markets provide significant marginal performance benefits to a globally well-diversified investor prior to 1997 and post 2003. Spanning tests demonstrate that emerging markets provide beneficial investment opportunities not captured by a benchmark portfolio that includes the MSCI US and developed market indices as well as US small, big, value and growth portfolios. We also find that emerging market equity investments, especially Latin American holdings, lead to positive Jensen’s alphas and spanning rejections in two sample periods, January 1988 through March 1997, and April 2003 through January 2010. Using the step-down tests of Kan and Zhou (2012) we show that benefits due to Latin American equity markets are persistent and relate to both the location of the global minimum variance portfolio and improvements in the slope of the investment opportunity set. Further, we find no evidence of a monotone reduction in emerging market diversification benefits over time. Rather, our results suggest that regime specific performance varies by region. We suggest differences across investment regimes might explain the disparate findings observed in existing studies of emerging market performance.

Keywords: Structural Breaks; Portfolio Performance; Multivariate Regression Models; Emerging Markets; Developed Markets; Jensen’s alpha; Spanning tests

JEL Classification: C32, G11, G15

Suggested Citation

Turtle, Harry J. and Zhang, Chengping, Structural Breaks and Portfolio Performance in Global Equity Markets (2015). Quantitative Finance, Vol. 15, No. 6, June 2015, pp. 909-922.. Available at SSRN: https://ssrn.com/abstract=2609613

Harry J. Turtle

Colorado State University, Fort Collins - Department of Finance & Real Estate ( email )

Fort Collins, CO 80523
United States

Chengping Zhang (Contact Author)

George Fox University ( email )

414 N. Meridian Street
Newberg, OR 97132
United States

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