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The Best of Both Worlds: Accessing Emerging Economies via Developed Markets

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  • JOON WOO BAE
  • REDOUANE ELKAMHI
  • MIKHAIL SIMUTIN

Abstract

A growing body of evidence suggests that the benefits of international diversification via developed markets have declined dramatically. While emerging markets still offer diversification opportunities, their public equity indices capture only a fraction of emerging countries' economic activity. We propose a diversification approach that exploits the global connectedness of developed countries to gain exposure to emerging countries' overall economies rather than their shallow equity markets. In doing so, we demonstrate that developed markets still offer substantial diversification benefits beyond those available through equity indices. Our results suggest that relying on equity indices to assess diversification benefits understates diversification gains.

Suggested Citation

  • Joon Woo Bae & Redouane Elkamhi & Mikhail Simutin, 2019. "The Best of Both Worlds: Accessing Emerging Economies via Developed Markets," Journal of Finance, American Finance Association, vol. 74(5), pages 2579-2617, October.
    • Handle: RePEc:bla:jfinan:v:74:y:2019:i:5:p:2579-2617
    DOI: 10.1111/jofi.12817
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    Cited by:

    1. Dumas, Bernard & Gabuniya, Tymur & Marston, Richard C, 2020. "Firms' Exposures to Geographic Risks," CEPR Discussion Papers 15503, C.E.P.R. Discussion Papers.
    2. Jing Chen & Junxiong Fang & Chunqiu Zhang & Yi Zhou, 2023. "Homemade international diversification under economic policy uncertainty," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 46(1), pages 31-62, February.
    3. Vicente J. Bermejo & José M. Campa & Rodolfo G. Campos & Mohammed Zakriya, 2020. "Do foreign stocks substitute for international diversification?," European Financial Management, European Financial Management Association, vol. 26(5), pages 1191-1223, November.
    4. Attig, Najah & Guedhami, Omrane & Nazaire, Gregory & Sy, Oumar, 2023. "What explains the benefits of international portfolio diversification?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 83(C).
    5. Giovanna Culot & Matteo Podrecca & Guido Nassimbeni & Guido Orzes & Marco Sartor, 2023. "Using supply chain databases in academic research: A methodological critique," Journal of Supply Chain Management, Institute for Supply Management, vol. 59(1), pages 3-25, January.
    6. Irem Demirci & Miguel A Ferreira & Pedro Matos & Clemens Sialm, 2022. "How Global Is Your Mutual Fund? International Diversification from Multinationals," The Review of Financial Studies, Society for Financial Studies, vol. 35(7), pages 3337-3372.
    7. Dumas, Bernard & Gabuniya, Tymur & Marston, Richard C., 2022. "Firms’ exposures to geographic risks," Journal of International Money and Finance, Elsevier, vol. 122(C).
    8. Hong Rim & Robert Setaputra, 2020. "Equity Market Integration And Diversification: Evidence From Emerging And Developed Countries," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 14(2), pages 51-59.
    9. Shan, Chenyu & Tang, Dragon Yongjun & Wang, Sarah Qian & Zhang, Chang, 2022. "The diversification benefits and policy risks of accessing China’s stock market," Journal of Empirical Finance, Elsevier, vol. 66(C), pages 155-175.
    10. Schlingemann, Frederik P. & Stulz, René M., 2022. "Have exchange-listed firms become less important for the economy?," Journal of Financial Economics, Elsevier, vol. 143(2), pages 927-958.
    11. Nikolay Osadchiy & William Schmidt & Jing Wu, 2021. "The Bullwhip Effect in Supply Networks," Management Science, INFORMS, vol. 67(10), pages 6153-6173, October.
    12. Lin, Anchor Y. & Lin, Yueh-Neng, 2021. "Market similarity and cross-border investment performance," Finance Research Letters, Elsevier, vol. 40(C).
    13. Iyke, Bernard Njindan & Maheepala, M.M.J.D., 2022. "Conventional monetary policy, COVID-19, and stock markets in emerging economies," Pacific-Basin Finance Journal, Elsevier, vol. 76(C).

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