Similarity of emerging market returns under changing market conditions: Markets in the ASEAN-4, Latin America, Middle East, and BRICs

•18 emerging markets are examined.•Risk-return characteristics are less similar in more volatile periods.•Correlations and risk-return distances are distinct measures of co-movements.•Emerging stock markets may still provide diversification benefits.

We studied the risk-return distances of 18 emerging stock markets in the period from January 2000 to December 2013. Distances are linked to volatility and time-varying correlations estimated in standard and asymmetric DCC models. Our results revealed a positive relationship between risk-return distances and volatility, which means that during more volatile periods, the risk-return characteristics in emerging markets exhibit lower similarity to the characteristics found in developed markets. This result seems to be in sharp contrast to most empirical studies using correlations. Within the portfolio framework, our results suggest that diversification into emerging stock markets may still provide desirable benefits to international investors.