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Emerging stock markets: a more realistic assessment of the gains from diversification

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  • S. G. M. Fifield
  • D. M. Power
  • C. D. Sinclair

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.

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  • S. G. M. Fifield & D. M. Power & C. D. Sinclair, 2002. "Emerging stock markets: a more realistic assessment of the gains from diversification," Applied Financial Economics, Taylor & Francis Journals, vol. 12(3), pages 213-229.
    • Handle: RePEc:taf:apfiec:v:12:y:2002:i:3:p:213-229
    DOI: 10.1080/09603100110090082
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    2. Kamil, Nazrol K.M. & Bacha, Obiyathulla I. & Masih, Mansur, 2021. "Is there a diversification “cost” of Shari’ah compliance? Empirical evidence from Malaysian equities," Economic Systems, Elsevier, vol. 45(1).
    3. Middleton, C.A.J. & Fifield, S.G.M. & Power, D.M., 2008. "An investigation of the benefits of portfolio investment in Central and Eastern European stock markets," Research in International Business and Finance, Elsevier, vol. 22(2), pages 162-174, June.
    4. Camilleri, Silvio John & Galea, Gabriella, 2009. "The Diversification Potential Offered by Emerging Markets in Recent Years," MPRA Paper 62491, University Library of Munich, Germany.
    5. A. Assaf, 2007. "Fractional integration in the equity markets of MENA region," Applied Financial Economics, Taylor & Francis Journals, vol. 17(9), pages 709-723.

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