Industry and country factors in emerging market returns: Did the Asian crisis make a difference?

Should investors diversify across emerging stock markets or across industries to achieve improvements in their risk–return tradeoffs especially during financial crisis periods? We examine the issue using individual firm data from a selection of emerging markets and including the period of the 1997 Asian financial crisis. We find that country effects were the dominant force behind the low co-movements among emerging stock market returns. There is evidence of increased industry effects beginning at the time of the Asian financial crisis, but this may have been a temporary phenomenon associated with contagion effects during the crisis.