Friday 22 May 2020

Nostalgic Research: Why Invest in Emerging Markets?

The next installment in our Nostalgic Research series is Why Invest in Emerging Markets? The Role of Conditional Return Asymmetry, published in 2014.

At the time of publication, interest and liquidity in emerging stock markets was peaking, and the prospects of international diversification were waning. The current situation in the markets is starkly different. 

However, the question posed by authors Eric Ghysels, Alberto Plazzi, and Rossen Valkanov remains relevant: are there reasons beyond diversification that can justify investing in emerging economies?

In this paper, we ask whether it is profitable to invest in emerging stock markets in the quest for skewness. More specifically, we investigate the economic gains from exploiting asymmetries in the distribution of returns across international markets. In a broader context, is an investment in emerging economies, such as China or Kenya, as much about the prospect of larger gains than losses as it is about diversification?

We use a new approach to estimate the conditional asymmetry in portfolio returns at different points of the distribution and study a large cross-section of developed and emerging markets. Estimates of CA reveal several novel results such as significant dynamics over time, heterogeneity across countries, a low correlation between asymmetries of DM and EM portfolio returns, and negative correlation with the conditional volatility. These findings have significant implications for international asset allocation and risk sharing.”

Members can access the research via the Inquire Europe archives: