Emerging Equity Markets: To Invest Or Not To Invest?

Abstract

Numerous studies suggest that investors diversifying their portfolios with equity of emerging markets benefit from increased returns and/or reduced volatility. Using a 16-year sample from 1988 to 2003, we test this assertion and find that ex-post benefits to U.S. investors in this period are small. Our tests show that the improvement in portfolio performance is not consistent through time, and it is statistically significant only when we restrict our analysis to some regions and/or specific time periods. We find that the lack of significant gains of diversifying into emerging markets is caused by problems with the two main sources of diversification benefits: contrary to expectations, emerging markets have low relative realized returns and their correlation with the U.S. stock market has increased over time.