Momentum in Emerging Markets
Reality < Theory
February 2022. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- Long-short momentum investing highlights attractive performance in Asia and emerging markets
- However, realized excess returns are significantly lower than theoretical ones
- Likely explained by transaction costs
INTRODUCTION
Momentum has been shown to generate attractive excess returns across eight different markets and asset classes by AQR, a quantitative asset manager. Christopher Geczy and Mikhail Samonov demonstrated that it also works across centuries by measuring the price momentum of US stocks between 1801 and 2012.
Although we need to differentiate between cross-sectional and time-series momentum, broadly speaking it is a profitable investment strategy to buy assets when they are going up or outperforming, and shorting ones that are declining or underperforming. Few investment strategies have been more researched and are more widely supported by academic finance professionals (read Momentum Variations).
However, momentum investing in stocks is thought to work better in the US and Europe than in Asia or emerging markets. In this research note, we will explore cross-sectional momentum in Asia and EM.
PERFORMANCE OF THE MOMENTUM FACTOR IN THE US, EUROPE, AND JAPAN
We use the factor returns from the Kenneth R. French data library in this analysis. First, we look at the long-short performance of the momentum factor, which buys outperforming and shorts underperforming stocks, across the major developed stock markets.
We observe that this strategy generated abnormally high excess returns in Europe, moderate returns in North America, but has been steadily losing money in Japan.
