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Why Invest in Emerging Markets? The Role of Conditional Return Asymmetry
Author(s) -
GHYSELS ERIC,
PLAZZI ALBERTO,
VALKANOV ROSSEN
Publication year - 2016
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12420
Subject(s) - skewness , economics , emerging markets , downside risk , portfolio , financial economics , quantile , openness to experience , balance of payments , econometrics , stock (firearms) , monetary economics , finance , psychology , social psychology , mechanical engineering , engineering
We propose a quantile‐based measure of conditional skewness, particularly suitable for handling recalcitrant emerging market (EM) returns. The skewness of international stock market returns varies significantly across countries over time, and persists at long horizons. In EMs, skewness is mostly positive and idiosyncratic, and significantly relates to a country's financial and trade openness and balance of payments. In an international portfolio setting, return asymmetry leads to sizeable certainty‐equivalent gains and increases the weight on emerging countries to about 30%. Investing in EMs seems to be about expectations of a higher upside than downside, consistent with recent theories.