Stock Selection Strategies in Emerging Markets
Recent empirical evidence suggests that value and momentum strategies generate significant excess returns in emerging markets. We confirm these results and extend them in several directions. First, we examine a broader range of stock selection strategies, including strategies based on analysts' earnings revisions. We also consider multivariate strategies, whereby stocks are selected on multiple characteristics, and find that this enhances the overall performance. Excess returns also increase if country selection is incorporated into the strategies, but the risk of the strategies increases proportionally. Second, we test whether the strategies can be implemented successfully in practice by a large institutional investor, facing a lack of liquidity, restrictions on foreign ownership and substantial transaction costs. We find that even under such more realistic circumstances the strategies earn significant excess returns. Third, we examine several popular explanations for the excess returns. We find no evidence of higher market risk or lower liquidity of the strategies. Instead, based on the developments of earnings and earnings revisions after portfolio formation, we find that the results are consistent with behavioral explanations.
|Keywords||behavioral models, earnings revisions, market imperfections, momentum, overreaction, risk, underreaction, value|
van der Hart, J., Slagter, E., & van Dijk, D.J.C.. (2001). Stock Selection Strategies in Emerging Markets (No. TI 01-009/4). Retrieved from http://hdl.handle.net/1765/6879