The Best of Both Worlds: Accessing Emerging Economies via Developed Markets

87 Pages Posted: 22 Jul 2015 Last revised: 23 Aug 2018

See all articles by Joon Woo Bae

Joon Woo Bae

Case Western Reserve University - Weatherhead School of Management

Redouane Elkamhi

University of Toronto - Rotman School of Management

Mikhail Simutin

University of Toronto - Rotman School of Management

Date Written: August 22, 2018

Abstract

A growing body of evidence suggests that the benefits of international diversification via developed markets have dramatically declined. While emerging markets still offer diversification opportunities, their public equity indices capture only a fraction of economic activity of emerging countries. We propose a diversification approach that exploits the global connectedness of developed countries to gain exposure to emerging countries' overall economies rather than their shallow equity markets. In doing so, we demonstrate that developed markets still offer substantial diversification benefits beyond those available through equity indices. Our results suggest that relying on equity indices to assess diversification benefits understates diversification gains.

Keywords: International diversification, emerging markets, developed markets, diversification benefits, performance, export links, market integration

JEL Classification: G11, G12, G15, F30

Suggested Citation

Bae, Joon Woo and Elkamhi, Redouane and Simutin, Mikhail, The Best of Both Worlds: Accessing Emerging Economies via Developed Markets (August 22, 2018). Journal of Finance, Forthcoming; Rotman School of Management Working Paper No. 2633557. Available at SSRN: https://ssrn.com/abstract=2633557 or http://dx.doi.org/10.2139/ssrn.2633557

Joon Woo Bae

Case Western Reserve University - Weatherhead School of Management ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States

Redouane Elkamhi

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Mikhail Simutin (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/simutin

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