International Diversification into Emerging Equity Markets: Perspective of U.S. Investors

In this study, we examine whether investing in emerging markets is indeed beneficial to U. S. investors. The results we find in this study are not so encouraging for U. S. investors. First, the change in currency exchange rate weakens the benefit of overseas investment to U. S. investors. Second, the correlations between the U. S. market and the emerging markets have been steadily rising during the sample period. Third, most of these emerging equity markets scored lower Sharpe Ratios than the U. S. equity market. Fourth, we find that the emerging market and its currency market move in the same direction. Finally, we find that emerging markets are more sensitive to the U. S. stock market return when it falls rather than when it rises. In other words, the magnitude of the negative return on these emerging markets in response to the U. S. down market is larger than the positive return in response to the U. S. up market, which defeats the purpose of international diversification.