Predictable Risk and Returns in Emerging Markets

The emergence of new equity markets in Europe, Latin America, Asia, the Mideast and Africa provides a new menu of opportunities for investors. These markets exhibit high expected returns as well as high volatility. Importantly, the low correlations with developed countries' equity markets signi...

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Bibliographic Details
Published in:The Review of financial studies 1995-10, Vol.8 (3), p.773-816
Main Author: Harvey, Campbell R.
Format: Article
Language:English
Subjects:
1993 RFS/WFA Symposium on International Financial Markets and Prices
Capital markets
Developing countries
Emerging markets
Equity
Expected returns
Financial risks
Industrialized nations
International finance
Investment risk
LDCs
Market portfolios
Modeling
P values
Predictability
Pricing
Risk factors
Standard deviation
Statistical variance
Stock exchanges
Stock returns
Volatility
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Summary:The emergence of new equity markets in Europe, Latin America, Asia, the Mideast and Africa provides a new menu of opportunities for investors. These markets exhibit high expected returns as well as high volatility. Importantly, the low correlations with developed countries' equity markets significantly reduces the unconditional portfolio risk of a world investor. However, standard global asset pricing models, which assume complete integration of capital markets, fail to explain the cross section of average returns in emerging countries. An analysis of the predictability of the returns reveals that emerging market returns are more likely than developed countries to be influenced by local information.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/8.3.773