Asset Allocation: Emerging Markets and Technology Stocks

41 Pages Posted: 1 Mar 2002

See all articles by Nuno Fernandes

Nuno Fernandes

University of Navarra, IESE Business School; European Corporate Governance Institute (ECGI)

Date Written: February 2002


During the last two decades, liberalization of capital markets in emerging markets was a common trend. Liberalization caused an increased responsiveness to world factors. Indeed, as argued in this paper, emerging markets are now behaving like certain developed markets' asset classes. This study develops a framework for asset classes' comparisons in an increasingly integrated world market, focusing on two aspects - diversification benefits and risk profiles. The set of tools used includes the standard Markowitz mean-variance analysis, spanning tests, the International CAPM, lower-moment CAPM and a conditional asset pricing model which allows time-variation in the betas. The empirical analysis focuses on two asset classes: emerging markets and technology stocks. It is found that after allowing investment in technological stocks, there are no significative gains from an aggregate investment in emerging market equities. Furthermore, the mean variance spanning test shows that emerging markets as a whole are spanned by developed market indices. The conditional framework shows that global risk factors have similar impact on the two asset classes in consideration, and in particular that conditional betas tend to covary simultaneously with business cycle proxies. These results contrast with previous studies, and can be justified by the increasing integration of emerging markets and a longer (and more realistic) time frame. The results show that the value added of diversified index funds of emerging markets' equities is low, and that individual country selection can provide very distinct results. The study has implications for global asset allocation, home bias and cost of equity estimation.

Keywords: Emerging Markets, Spanning tests, International diversification, Home bias, Conditional Asset Pricing

JEL Classification: F36, G11, G12, G15

Suggested Citation

Fernandes, Nuno, Asset Allocation: Emerging Markets and Technology Stocks (February 2002). Available at SSRN: or

Nuno Fernandes (Contact Author)

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

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