Working Paper: NBER ID: w4621
Authors: Campbell R. Harvey
Abstract: 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.
Keywords: Emerging Markets; Asset Pricing; Investment Opportunities; Local Information
JEL Codes: G11; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| emerging market assets (G15) | portfolio opportunities (G11) |
| emerging market equities (G15) | risk exposures (G22) |
| local information (R53) | return dynamics (C69) |
| emerging market returns (G15) | predictability (D84) |