Reproducibility package for Small Emerging Markets: A New Asset Class

This paper examines whether small low- and middle-income countries (LMICs) offer excess returns and diversification benefits to global investors. Using monthly equity price data from 2015–2025, we pool listed stocks from LMICs whose populations fall below a given threshold and construct value-weighted portfolios, sorted by population and land area. We then estimate a two-factor asset-pricing model to evaluate their risk-adjusted performance relative to developed- and emerging-market benchmarks. Portfolios restricted to countries with fewer than 20 million people—or less than 100,000 square kilometers—earn positive and economically meaningful alphas alongside low covariances with global-market returns. Risk-adjusted performance, measured by an adjusted Treynor ratio, peaks in the 15–20 million population range. Once larger LMICs enter the portfolio, integration with global markets rises sharply, alphas converge to zero, and diversification benefits vanish. No analogous pattern appears among high-income countries, where even very small markets are fully integrated. These results point to a “Small Emerging Market Asset Class”: small developing economies remain partially segmented, combining exposure to undiversifiable country-specific risks stemming from structural vulnerability (e.g., heightened climate and environmental risk) with limited financial integration, for which investors appear to be compensated. Small LMICs thus form a distinct frontier for international portfolio diversification.