Re-Emerging Markets

Abstract

Abstract Thanks in large measure to the International Financial Corporation’s efforts to identify and gather data on the markets of developing countries, investors over the past 20 years have grown increasingly interested in emerging markets. Suppose we simply defined an emerging market as one that has been continuously “investable” for only a short period of time—that is, it recently emerged. Can we infer anything about its risk and return characteristics? In this article we use a simulation model to argue that recent emergence can potentially reveal a great deal about the statistical properties of a market. In particular, if a market popped up recently, we would expect it to have a low future return, high volatility, and low correlation to the world markets. The importance of this article is that we identify emerging markets as “marginal markets” in the world economy—valuable for diversification, but not obviously attractive for expected return.

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