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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.

Suggested Citation

  • Kouwenberg, Roy & Salomons, Roelof, 2003. "Value investing in emerging markets : local macroeconomic risk and extrapolation," Research Report 03E22, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
  • Handle: RePEc:gro:rugsom:03e22
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    File URL: http://irs.ub.rug.nl/ppn/252311280
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