“Why Invest in Emerging Markets? The Role of Conditional Return Asymmetry” by Rossen Valkanov
UNC and CEPR
University of Lugano and SFI
We propose a quantile-based measure of conditional asymmetry. We find that the asymmetry of international stock market returns varies significantly across countries, over time, and persists at long horizons. The asymmetry of emerging stock returns is positive and does not co-move with that of developed markets. In an international portfolio setting, conditioning on return asymmetry leads to sizeable certainty equivalent gains relative to the value-weighted benchmark. It also increases the weight on emerging indices from 9% to between 25% and 40%. Investing in emerging markets seems to be about expectations of a higher upside than downside, consistent with recent theories.