Asymmetric risk measures when modelling emerging markets equities: evidence for regional and timing effects

Abstract

Asymmetric risk measures have been advocated as useful tools when analysing non-normal returns distributions such as are prevalent in emerging markets-but when and where will they make a difference to equity returns modelling? Using a data generating process, we test the conditions under which two models based on asymmetric risk (the Lower Partial Moment CAPM and a general Asymmetric Response Model) explain more of the variability of returns for individual emerging market equities than the mean-variance CAPM. Our results reveal that for some countries and time periods, which can be linked to political and economic ‘events’, asymmetric risk is natually more value-added than for others. A conclusion of our analysis is that good practice risk and asset management in emerging markets involves customised approaches to quantitative analysis across regions and regular reviews of model assumptions.