Risk-Adjusted Performances of World Equity Indices

Abstract

This paper investigates whether equity indices of 24 emerging and 28 developed markets compensate their investors equally after taking risk into account, and examines the predictive power of reward-to-risk ratios for expected market returns. We place special emphasis on downside risk by calculating both nonparametric and parametric value at risk. We find that when all 52 markets are ranked based on their alternative reward-to-risk ratios, almost all of the countries in the top quartile are emerging markets whereas almost all of the countries in the bottom quartile are developed markets. The pooled means of the reward-to-risk ratios are significantly higher for emerging markets compared to those of developed markets. Our main analysis reveals that there is a significantly positive relation between various reward-to-risk metrics and expected market returns. Both portfolio analysis and cross-sectional regressions are utilized to examine this relation.