Best Practice Risk Measurement in Emerging Markets: Empirical Test of Asymmetric Alternatives to CAPM

Downside and asymmtric risk measurement lends itself naturally to emerging equity markets, and offer an attractive alternative to traditional techniques.We investigate which of three models best fits the equity returns of emerging markets: CAPM, the Lower Partial Moment CAPM (LPM-CAPM), and an Asymmetric Response Model (ARM), and discuss implications for investment strategies and risk management. Using 10 years daily, weekly, and monthly returns of 690 MSCI Emerging Markets Free constituents, CAPM is not rejected for daily returns in 55% of cases, whilst for monthly returns, on average 80% of emerging market stocks are as well explained by CAPM as with asymmetric alternatives; in general, these are comparable to results for small UK companies. Our results reveal a strong ’regional effect’, which we explore in more details, with reference to economic and political crisis. A clear conclusion of our analysis is that best practice risk and asset management involves customised approaches to quantitative economic analysis across geographies, and that one needs to take great care when recalibrating models, especially in more volatile periods. JEL Classifications: C10, G12