Asset allocation and investment opportunities in emerging stock markets: Evidence from return asymmetry-based analysis

• Published in: Journal of international money and finance 2019-05, Vol.93, p.187-200
• Main Authors: Hadhri, Sinda, Ftiti, Zied
• Format: Article
• Language: English
• Subjects: Diversification opportunities; Emerging markets; Investment strategy; Realized skewness
• ISSN: 0261-5606; 1873-0639
• DOI: 10.1016/j.jimonfin.2019.01.002

•Realized skewness is used to check the emerging markets’ investment profitability.•Different skewness-based strategies are considered for regional emerging markets.•Return asymmetry produces sizeable certainty equivalent gains.•Investments in emerging markets outperform those in developed markets.•Results are robust across time horizons and across various asymmetry measures. This paper investigates whether it is profitable to invest in emerging markets. In addition to the classical first and second moments used in asset allocation, we focus on the third moment: realized skewness. From an empirical viewpoint, we show that some emerging markets exhibit a positive realized skewness and others a negative one. A skewness-based analysis across markets emphasizes potential opportunities for portfolio diversification and investment strategies. Furthermore, we propose different skewness-based strategies for investing in regional emerging markets, and find that return asymmetry leads to sizeable certainty equivalent gains. Our results show that investments in emerging markets seem to outperform investments in developed markets over time and for different time horizons especially in crisis periods. These results are robust to the use of the robust asymmetry measure of Brys et al. (2004) and, hence, international emerging markets are recommended as investment avenues over developed markets.