Emerging Stock Markets: A More Realistic Assessment of the Gains from Diversification

Suzanne Fifield, David Power, C. D. Sinclair

    Research output: Contribution to journalArticlepeer-review

    9 Citations (Scopus)

    Abstract

    Over the last decade, a number of studies have examined the costs and benefits from investing in equities traded on emerging stock markets (ESMs). The general conclusion to emerge from these studies is that investors have been able to improve portfolio performance significantly by including an emerging equity market component in investment portfolios. However, the ex-post framework utilized in past analyses potentially overstates the true level of gains which can be obtained from an emerging market diversification strategy; they are computed on the assumption that, with respect to the inputs to the portfolio decision, investors are blessed with perfect foresight. This paper attempts to overcome this problem by estimating the ex-ante gains available from investing in emerging stock markets. In particular, the paper investigates whether, by using a simple strategy based on historical data to forecast portfolio inputs, all of the gains which are available from ex-post analyses of diversification can be achieved in practice. The results obtained point overwhelmingly to the inadvisability of relying on historical data to identify ex-ante optimal emerging market portfolios; the strategies examined in this paper achieved very few of the gains attained in ex-post analyses of diversification.
    Original languageEnglish
    Pages (from-to)213-229
    Number of pages17
    JournalApplied Financial Economics
    Volume12
    Issue number3
    DOIs
    Publication statusPublished - 2002

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