Cracking the Emerging Markets Enigma

Cracking the Emerging Markets Enigma

Oxford UP, 2015




  • Innovative
  • Applicable


The risks are many and complex when you invest in emerging markets. G. Andrew Karolyi, a finance professor at Cornell University, takes on the formidable challenge of creating a comprehensive framework of quantifiable risk measures for investing in emerging markets, thereby providing investors with additional tools for making portfolio decisions. He constructs six risk metrics from recent public-source investment data. Karolyi admits that the performances of his indicators are uneven, but his textbook-like, systematic approach may well be an important advancement over conventional decision-making alternatives. This technical work is a difficult read, dense in details of methodology and statistical results, but very worthwhile. While never giving investment advice, getAbstract believes that investment professionals, policy makers and economic researchers could find that this study amounts to required reading in its field.


A Framework of Six Risk Indicators

The International Finance Corporation (IFC) classifies a country as an emerging market if it has either “a low- or middle-income economy” or a low “investable market capitalization,” compared to its gross domestic product (GDP). In the later case, a lack of capital could hold back a nation’s true growth potential. For example, it may not be harnessing the latest mobile phone technology and, therefore, may offer opportunities for profitable investments with attractive returns.

So then, what is preventing investors from putting the large volumes of capital sloshing around in developed nations to work to a greater extent in emerging markets? What risks are making investors wary of emerging market opportunities, and can analytics quantify these risks into an investing scorecard? Six risk metrics can help create an evaluation framework:

  1. “Market capacity constraints” – Before investing in a country, you’d want it to have developed internal capital markets. Gauging market capacity takes into account both the functioning of capital markets and their size, compared to the country’s economic need. A set of indicators can evaluate...

About the Author

A former president and current trustee of the Financial Management Association, G. Andrew Karolyi is a professor of finance and global business at Cornell University and executive editor of the Review of Financial Studies.

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