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Value investing in emerging markets : local macroeconomic risk and extrapolation

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  • Kouwenberg, Roy
  • Salomons, Roelof

    (Groningen University)

Abstract

Our results confirm the profitability of value investing at the country level in emerging markets. A portfolio of countries with low price-to-book ratios significantly outperforms a portfolio of high price-to-book countries. Global risk factors cannot explain this outperformance. Next we measure a number of macroeconomic variables of the countries in the long and short value portfolios, as a proxy for local risk factors. We find that the countries in the low price-to-book portfolio on average have significantly lower economic growth, higher growth volatility, higher inflation, more overvalued currencies and more volatile currencies, compared to the high price-to-book portfolio. After portfolio formation, the difference in economic fundamentals between the high and low price-to-book portfolios decreases significantly, which indicates that investors might be extrapolating past economic trends too far into the future.

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File URL: http://irs.ub.rug.nl/ppn/252311280
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Bibliographic Info

Paper provided by University of Groningen, Research Institute SOM (Systems, Organisations and Management) in its series Research Report with number 03E22.

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Date of creation: 2003
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Handle: RePEc:dgr:rugsom:03e22

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  1. Nijman, T.E. & Roon, F.A. de & Werker, B.J.M., 2001. "Testing for Mean-Variance spanning with short sales constraints and transaction costs: The case of emerging markets," Open Access publications from Tilburg University urn:nbn:nl:ui:12-86724, Tilburg University.
  2. Philippe Jorion & William N. Goetzmann, 1998. "Re-Emerging Markets," Yale School of Management Working Papers, Yale School of Management ysm111, Yale School of Management.
  3. Jorion, Philippe, 1991. "The Pricing of Exchange Rate Risk in the Stock Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 26(03), pages 363-376, September.
  4. Geert Bekaert & Campbell R. Harvey, 2000. "Foreign Speculators and Emerging Equity Markets," Journal of Finance, American Finance Association, American Finance Association, vol. 55(2), pages 565-613, 04.
  5. Bekaert, Geert, 1995. "Market Integration and Investment Barriers in Emerging Equity Markets," World Bank Economic Review, World Bank Group, World Bank Group, vol. 9(1), pages 75-107, January.
  6. Bekaert, Geert & Harvey, Campbell R., 2003. "Emerging markets finance," Journal of Empirical Finance, Elsevier, Elsevier, vol. 10(1-2), pages 3-56, February.
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Cited by:
  1. Alvaro Montenegro, 2006. "La información bursátil en Colombia," DOCUMENTOS DE ECONOMÍA 003031, UNIVERSIDAD JAVERIANA - BOGOTÁ.
  2. Kortas, Mohamed & L'Her, Jean-Francois & Roberge, Mathieu, 2005. "Country selection of emerging equity markets: benefits from country attribute diversification," Emerging Markets Review, Elsevier, Elsevier, vol. 6(1), pages 1-19, April.

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