Predictable risk and returns in emerging markets

The emergence of new equity markets in Europe, Latin America,Asia, the Mideast and Africa provides a new menu of opportunitiesfor investors. These markets exhibit high expected returns aswell as high volatility. Importantly, the low correlations withdeveloped countries' equity markets significantly reduces theunconditional portfolio risk of a world investor. However, standardglobal asset pricing models, which assume complete integrationof capital markets, fail to explain the cross section of averagereturns in emerging countries. An analysis of the predictabilityof the returns reveals that emerging market returns are morelikely than developed countries to be influenced by local information.