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Extreme Observations and Diversification in Latin American Emerging Equity Markets

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  • Raúl Susmel

Abstract

In this paper, we focus on the tails of the unconditional distribution of latin American emerging markets stock returns. We explore their implications for portfolio diversification according to the safety first principle, first proposed by Roy (1952). We find that the Latin American emerging markets have significantly fatter tails than industrial markets, especially, the lower tail of the distribution. We consider the implication of the safety first principle for a U.S. investor who creates a diversified portfolio using Latin America stock markets. We find that a U.S. investor gains by adding Latin American equity markets to her purely domestic portfolio. For different parameter specifications, we find a more realistic asset allocation than the one suggested by the literature based on the traditional meanvariance framework.

Suggested Citation

  • Raúl Susmel, 1998. "Extreme Observations and Diversification in Latin American Emerging Equity Markets," CEMA Working Papers: Serie Documentos de Trabajo. 138, Universidad del CEMA.
    • Handle: RePEc:cem:doctra:138
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    Cited by:

    1. Rishma Vedd & Paul Lazarony, 2014. "The Risk-Return Trade-Off Of Investing In Latin American Emerging Stock Markets," Accounting & Taxation, The Institute for Business and Finance Research, vol. 6(1), pages 93-104.

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    More about this item

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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