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Navigating Extreme Market Fluctuations: Asset Allocation Strategies in Developed vs. Emerging Economies

Lumengo Bonga-Bonga

Econometrics2026https://doi.org/10.3390/econometrics14010016article
AJG 1ABDC B
Weight
0.50

Abstract

This paper examines how assets from emerging and developed stock markets can be efficiently allocated during periods of financial crisis by integrating traditional portfolio theory with Extreme Value Theory (EVT), using the Generalized Pareto Distribution (GPD) and Generalized Extreme Value (GEV) approaches to model tail risks. This study evaluates mean-variance portfolios constructed under each EVT framework and finds that portfolios based on GPD estimates consistently favour emerging market assets, which outperform both developed market and internationally diversified portfolios during extreme market conditions. In contrast, GEV-based portfolios indicate superior performance for developed market assets, highlighting the distinct behaviour of returns in the upper and lower tails of the distribution. These contrasting results reveal the unique nature of safe-haven characteristics associated with developed economies, the assets of which demonstrate greater stability and resilience during episodes of financial stress. By showing how tail-risk modelling alters optimal portfolio weights across market types, this paper contributes new evidence to the literature on crisis-informed asset allocation and offers practical insights for investors seeking robust diversification strategies under extreme market fluctuations.

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https://doi.org/https://doi.org/10.3390/econometrics14010016

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@article{lumengo2026,
  title        = {{Navigating Extreme Market Fluctuations: Asset Allocation Strategies in Developed vs. Emerging Economies}},
  author       = {Lumengo Bonga-Bonga},
  journal      = {Econometrics},
  year         = {2026},
  doi          = {https://doi.org/https://doi.org/10.3390/econometrics14010016},
}

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