Research Directions: International Investments
This chapter discusses investment issues in the emerging. I think that the best way to do this is to review what has been done in the past, to see where we are, and then to ponder the future. To this effect, I have prepared a bibliography. There are two basic problems with this list. First, it is heavily baised toward my research interests. Second, all the references are North American, which to some degree reflects my ignorance about other bibliographical sources. For example, I do know that there are quite a few Brazilian, Indian, and Hong Kong publications on the emerging markets. With the cooperation of authors who send me their published or working papers, I hope to be able to update the list appropriately.
A number of studies have demonstrated gains from diversification into emerging markets. They include Levy and Sarnat ( 1970), the first study that included emerging markets (EMs); Lessard ( 1973), on four Latin American countries; Errunza( 1977), on IMF data; and ( 1983), on the emerging markets data base. Since the results are well known and no are expected, we can safely suggest that at present further work is not warranted.
Perfect-market international asset pricing models (IAPMs) suggest that investors should hold world market portfolios. However, we observe that relatively speaking, Americans hold more American stocks, Brazilians hold more Brazilian stocks, and so on. In an attempt to explain this divergence and to model a world market structure that is neither fully integrated nor completely segmented, re-