Extreme Observations and Diversification in Latin American Emerging Equity Markets

Raúl Susmel

No 138, CEMA Working Papers: Serie Documentos de Trabajo. from Universidad del CEMA

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.

JEL-codes: C53 G15 (search for similar items in EconPapers)
Date: 1998-10
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:cem:doctra:138

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