consequences for global portfolios. Indeed, these characteristics often define the difference in investment in the capital markets of developed and emerging economies.
Research on emerging markets has suggested three market features: high average returns, high volatility and low correlations both across the emerging markets and with developed markets. Indeed, the lesson of volatility was learned the hard way by many investors in December 1994 when the Mexican stock market began a fall that would reduce equity value in U.S. dollars by 80% over the next three months.
But, we have learned far more about these fledgling markets. First, we need to be careful in interpreting the average performance of these markets. Harvey (1995) points out that the International Finance Corporation (IFC) backfilled some of the index data resulting in a survivorship bias in the average returns. Second, the countries that are currently chosen by the IFC are the ones that have a proven track record. This selection of winners induces another type of selection bias. Third, Goetzmann and Jorion (1996) detail a re-emerging market bias. Some markets, like Argentina, have a long history beginning in the last half of the 19th century. At one point in the 1920's, Argentina's market capitalization exceeded that of the U.K. However, this market submerged. To sample returns from 1976 (as the IFC does), only measures the "re-emergence" period. A longer horizon mean, in this case, would be lower than the one calculated from 1976. This insight is consistent with the out-of-sample portfolio simulations carried out by Harvey (1993) indicating that the performance of the dynamic strategy was affect by the initial five years. Fourth, exposure as measured by the IFC is not necessarily attainable for world investor's [see Bekart and... [continues]
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