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WORKING PAPER

Conditional Asset Allocation in Emerging Markets

Campbell R. Harvey

Duke University, Durham, NC 27706, USA

National Bureau of Economic Research, Cambridge, MA 02138, USA

Abstract

Within the context of conditional asset allocation strategies, this paper explores the implications of the low correlations of the emerging market returns with developed market returns and the relatively high degree predictability of emerging countries' returns. It is well known that low correlations improve investment opportunities and my research provides out-of-sample validation of the improved performance. However, the most dramatic enhancement is generated by the use of conditioning information. Portfolio strategies that use conditioning information to predict emerging market returns produce impressive out-of-sample performance over the 1980-1992 period.