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

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Author Info
Hart, J. van der
Zwart, G.J. de
Dijk, D.J.C. van (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
Abstract

We examine competing explanations, based on risk and behavioral models, for the profitability of stock 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 bias appears 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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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 Revision_Date: 2009-10-28.

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

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

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