Industry and country factors in emerging market returns: Did the Asian crisis make a difference?

Should investors diversify across emerging stock markets or across industries to achieve improvements in their risk-return tradeoffs especially during financial crisis periods? We examine the issue using individual firm data from a selection of emerging markets and including the period of the 1997 Asian financial crisis. We find that country effects were the dominant force behind the low co-movements among emerging stock market returns. There is evidence of increased industry effects beginning at the time of the Asian financial crisis, but this may have been a temporary phenomenon associated with contagion effects during the crisis.

► We decompose emerging stock market returns into industry and country effects. ► Our data include the period of the 1997 Asian financial crisis. ► Country effects were the dominant factor in emerging market returns. ► Industry effects increase around the beginning of the Asian financial crisis. ► But, the increased industry effects appear to have been temporary.