International equity portfolios: Selecting the right benchmark for emerging markets

We examine two alternatives to the cap-weighted index for emerging markets: the GDP-weighted and the equally weighted (EW) indices. Over the 1990–2004 period, the GDP-weighted index dominates the cap-weighted index, and represents a promising alternative benchmark for the investment policy. The EW i...

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Bibliographic Details
Published in:Emerging markets review 2006-06, Vol.7 (2), p.111-128
Main Authors: Hamza, Olfa, Kortas, Mohamed, L'Her, Jean-François, Roberge, Mathieu
Format: Article
Language:English
Subjects:
Benchmark
Emerging markets
International equity portfolios
Rebalancing
Weighting
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Summary:We examine two alternatives to the cap-weighted index for emerging markets: the GDP-weighted and the equally weighted (EW) indices. Over the 1990–2004 period, the GDP-weighted index dominates the cap-weighted index, and represents a promising alternative benchmark for the investment policy. The EW index dominates all indices even after reasonable transaction costs are included. Three factors seem to play a role in explaining the EW index dominance: low concentration, more frequent rebalancing and larger allocations to small countries. Managing a fraction of an equity portfolio according to an EW scheme stands for a promising avenue to add value to the policy benchmark.
ISSN:1566-0141
1873-6173
DOI:10.1016/j.ememar.2006.01.001