The risk exposure of emerging equity markets

Abstract

The low correlation between returns in emerging equity markets and industrial equity markets implies that the global investor would benefit from diversification in emerg-ing markets. This article explores the sensitivity of the emerging-market returns to measures of global economic risk. When these traditional measures of risk are used, the emerging markets have little or no sensitivity. This finding is consistent with these markets ' being segmented from world capital markets. However, the correlation between the emerging-market returns and the risk factors appears to be changing over time. New interest in international investing has been partly caused by the emerging equity markets, which are attractive because of their high average returns and low correlations with industrial markets. Little is known, however, about how to measure the risk of investment in emerging markets. The goal of this article is to advance the understanding of the investment risk in emerging markets by measuring each market's exposure to a number of global economic forces. To measure risk in a meaningful way, an asset-pricing model is needed. I