Aurora Borealis
1 June 1997 Research Foundation

Emerging Stock Markets: Risk, Return, and Performance (Full Monograph PDF)

  1. Christopher B. Barry
  2. John W. Peavy
  3. Mauricio Rodriguez
Emerging Stock Markets: Risk, Return, and Performance (Full Monograph PDF) View the full book (PDF)

In this monograph, Christopher Barry, John Peavy, and Mauricio Rodriguez shine a light directly on the keys to understanding how emerging markets have functioned in the past two decades. Their work makes two contributions. First, and quite possibly foremost, the authors have done a thorough (and, by their own admission, painstaking) job of analyzing and summarizing stock return data for more than two dozen countries in the Emerging Markets Data Base maintained by the International Finance Corporation at the World Bank. The country-specific historical return and risk series they report—as well as the statistics for aggregate and regional indexes of these countries—offer readers a remarkable snapshot of the evolution in the investment performance, on both a local currency and U.S. dollar basis, of the emerging sector of the global economy. Simply stated, no other compendium of this information is currently available.

Although refining a database that will keep researchers busy for years to come would be enough of an accomplishment for many authors, Barry, Peavy, and Rodriguez do not stop there. Their second achievement is to scrutinize these return series to confirm or refute some of the most widely held beliefs about the way emerging markets operate. Their findings are enlightening—and sometimes surprising. For instance, the risk-reward trade-off in many of these developing countries has changed dramatically over time and in a way that contradicts the usual time diversification arguments advanced in many textbooks. The authors confirm the relatively low correlation coefficients between emerging and developed market securities (hence, the diversification benefits of including the former in portfolios of the latter) but caution that these correlations are extremely volatile when measured historically. To many readers, these results will go a long way toward establishing the efficacy of emerging market investments as a separate asset class.

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