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The Success Of Stock Selection Strategies In Emerging Markets: Is It Risk Or Behavioral Bias?

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  • Hart, J. van der
  • Zwart, G.J. de
  • Dijk, D.J.C. van
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    Abstract

    We examine competing explanations, based on risk and behavioral models, for the profitability ofstock selection strategies in emerging markets. We document that both emerging market risk and global risk factors cannot account for the significant excess returns of selection strategies based on value, momentum and earnings revisions indicators. The findings for value and momentum strategies are consistent with the evidence from developed markets supporting behavioral explanations. In addition, for value stocks, the most important behavioral biasappears to be related to underestimation of long-term growth prospects, as indicated by overly pessimistic analysts' earnings forecasts and above average earnings revisions for longer postformation horizons and by quite rapidly improving earnings growth expectations. Furthermore, we find that overreaction effects play a limited role for the earnings revisions strategy, as there is no clear return reversal up until five years after portfolio formation, setting this strategy apart from momentum strategies.

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    File URL: http://hdl.handle.net/1765/1922
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    Bibliographic Info

    Paper provided by Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam. in its series Research Paper with number ERS-2005-012-F&A.

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    Date of creation: 29 Mar 2005
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    Handle: RePEc:dgr:eureri:30002101

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    Web page: http://www.erim.eur.nl/

    Related research

    Keywords: risk; value; behavioral models; earnings revisions; momentum; overreaction; underreaction;

    This paper has been announced in the following NEP Reports:

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    Cited by:
    1. Galariotis, Emilios C., 2010. "What should we know about momentum investing? The case of the Australian Security Exchange," Pacific-Basin Finance Journal, Elsevier, vol. 18(4), pages 369-389, September.
    2. Huij, Joop & Post, Thierry, 2011. "On the performance of emerging market equity mutual funds," Emerging Markets Review, Elsevier, vol. 12(3), pages 238-249, September.

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