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Portfolio Enhancement Using Emerging Markets and Conditioning Information

Portfolio Investment in Developing Countries, The World Bank Discussion Series, (1993): 110-144

Campbell R. Harvey

This paper explores the low correlations of the emerging market returns with developed market returns and the relatively high degree of predictability of emerging economies' returns in the context of conditional asset allocation strategies. It is well known that low correlations improve investment opportunities and my research provides out-of-sample validation of the improved performance. The most dramatic enhancement, however, is generated by the use of conditioning information. Portfolio strategies that use conditioning information to predict emerging market returns produce out-of-sample performance that doubles traditional benchmark returns over the 1980-92 period.