PREDICTABLE RISK AND RETURNS IN EMERGING MARKETS

The emergence of new equity markets in Europe, Latin America, Asia, th e Mideast and Africa provides a new menu of opportunities for Investor s. These markets exhibit high expected returns as well as high volatil ity. Importantly, the low correlations with developed countries' equit y markets significantly reduces the unconditional portfolio risk of a world investor. However, standard global asset pricing models, which a ssume complete integration of capital markets, fail to explain the cro ss section of average returns in emerging countries. An analysis of th e predictability of the returns reveals that emerging market returns a re more likely than developed countries to be influenced by local info rmation.