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International Financial Issues in the Pacific RimGlobal Imbalances, Financial Liberalization, and Exchange Rate Policy$
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Takatoshi Ito and Andrew K. Rose

Print publication date: 2008

Print ISBN-13: 9780226386829

Published to Chicago Scholarship Online: February 2013

DOI: 10.7208/chicago/9780226387086.001.0001

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Growth and Returns in Emerging Markets

Growth and Returns in Emerging Markets

(p.241) 8 Growth and Returns in Emerging Markets
International Financial Issues in the Pacific Rim
Peter Blair Henry, Prakash Kannan
University of Chicago Press

This chapter examines the empirical validity of the following rationale for investing in the stock markets of developing countries—that high rates of economic growth in emerging markets provide great absolute investment opportunities. The chapter is organized as follows. Section 8.2 discusses how average realized stock returns in emerging markets over the last 30 years have not been significantly higher than realized stock returns in the United States. Section 8.3 constructs measures of expected returns using dividend-price ratios and earnings yields. Section 8.4 presents short vignettes that focus on inflation stabilization and capital account liberalization episodes in Latin America and Asia. Section 8.5 discusses a simple and consistent explanation for high growth with low returns in Asia, and low growth with high returns in Latin America. Relative to the low expectations for Latin America at the start of the 1980s, the region achieved better outcomes than Asia over the next 20 years. This hypothesis is consistent with the results of the regressions carried out in Section 8.4, where unexpected returns were shown to be positively correlated with unexpected growth.

Keywords:   stock markets, investments, developing countries, Latin America, Asia, economic growth, emerging markets, inflation, capital account liberalization, stock returns

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