Value stocks have higher returns than growth stocks in markets around the world. For the period 1975 through 1995, the difference between the average returns on global portfolios of high and low book-to-market stocks is 7.68 percent per year, and value stocks outperform growth stocks in twelve of thirteen major markets. An international capital asset pricing model cannot explain the value premium, but a two-factor model that includes a risk factor for relative distress captures the value premium in international returns. INVESTMENT MANAGERS CLASSIFY FIRMS that have high ratios of book-to-market equity ~B0M!, earnings to price ~E0P!, or cash flow to price ~C0P! as value stocks. Fama and French ~1992, 1996! and Lakonishok, Shleifer, and Vishny ~1994! show that for U.S. stocks there is a strong value premium in average returns. High B0M, E0P, or C0P stocks have higher average returns than low B0M, E0P, or C0P stocks. Fama and French ~1995! and Lakonishok et al. ~1994! also show that the value premium is associated with relative distress.

Abstract: Recent empirical evidence has established that a measure of downside risk, the semideviation with respect to the mean, explains the cross section of stock returns in emerging markets, and is a plausible variable to be used in a CAPM-type model to compute costs of equity. The evidence reported in this article indicates that the semideviation also explains the cross section of industry returns in emerging markets, thus adding to the robustness of this measure of downside risk. The evidence in this article also shows that, unlike it is the case across emerging markets, across industries in emerging markets beta is correlated to mean returns. Inés Bardají provided valuable research assistance. The views expressed below and any errors that may remain are entirely my own.

This paper -- a product of the Finance and Private Sector Development Division, Policy Research Department -- is part of a larger effort in the department to stud)' stock market development. The study was funded by the Bank's Research Support Budget under the research project "Stock Market Development and Financial Intermediary Growth" (RPO 67837) . Copies of this paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Paulina Sintim-Aboagye, room N9-057, extension 38526 (41 pages). June 1995

We examine the viability of quantitative techniques for investing in individual stocks in the Mexican market. We measure the information in various firm specific attributes in forming portfolio strategies designed to outperform standard benchmarks. This is the third of a series of papers that explores the selection mechanism in emerging markets. Our out-of-sample analysis suggests that we can achieve up to 15% out-performance of standard benchmarks with our buy portfolio. * This research was jointly conducted at Duke University and at Merrill Lynch. We would like to thank Martin O'Hare and Caroline Godden at Merrill Lynch Global Asset Management Ltd. for their valuable input. Statements in this publication do not reflect the views currently or previously held by Merrill Lynch Global Asset Management Limited (MLGAM) and are not necessarily reflective of the strategy employed by MLGAM or other parts of the Merrill Lynch Group. This publication is intended solely to demonstrate the resul...

Comparing investments opportunities in emerging and developed market is an important issue in international portfolio management. However, it is well-established that the stock market returns are non-normal and have time-varying moments. This creates a challenge in ranking alternative investment strategies especially in a dynamic setting. We propse a distribution-free test based on a spatial dominance approach introduced by Park (2007) which is more general than the stochastic dominance approach allowing us to compare the sum of utilities obtained from alternative investments accumulated over a certain holding period instead of at the fixed point between the intervals. Applying the proposed test, we find that investments in emerging market is indifferent from their developed market counterparts for all investment horizon ranging from 3 month to 5 year, only if the currency risk is explicitly taken into account of. This suggests an integration between the two markets according to definition byBekaert and Harvey (2003). We also find that the returns of emerging market denominated in the local currency dominate those in the US dollar over 1- and 5-year investment horizons, implying that there is still an insufficient interaction between equity prices and foreign exchange rates in emerging markets in the longer-term. As expected, currency risk is found to be mostly irrelevant for developed market investments. JEL Classification: C14, G15.

The proper identification of the risk variables that explain the cross section of returns in emerging markets has many and far-reaching implications for both companies and investors. We examine this risk-return relationship by focusing on three families of models, over 25 years of data, and over 1,600 companies in 30 countries. We perform a statistical analysis that seeks to identify the variables that should be incorporated into the calculation of required returns on equity, and an economic analysis that seeks to determine the variables that produce the most profitable portfolio strategies. We find rather weak statistical results that prevent us from strongly recommending a given family to estimate required returns on equity. And we find somewhat stronger economic results that show that a variable belonging to our downside-risk family, the global downside beta, is the one that has the largest impact on returns when portfolios are rebalanced every five years. 1.