Size, Value, and Momentum in Emerging Market Stock Returns: Integrated or Segmented Pricing?

Abstract

In this paper, we examine size, value, and momentum patterns in the stock returns of four emerging market regions—Latin America, EMEA, Asia, and BRIC. We document a strong and highly significant value effect, and a strong but less significant momentum effect. Substantial value and momentum premiums are also present for big stocks and the overall premiums are not mainly driven by small stocks. Furthermore, the value patterns in emerging markets are more pronounced than in developed markets. In order to examine integrated global pricing across these regions, we test whether empirical asset pricing models with global factors explain the variation in average stock returns and, in particular, we assess their ability to capture the value and momentum patterns. Since the global models perform poorly for emerging markets, we examine the performance of local factor models, and find evidence in favor of the local four‐factor model with local market, size, value, and momentum factors. On the basis of our results, pricing in emerging markets does not seem to be globally integrated.

How do investors price stocks?—Evidence with real‐time data from Vietnam

“…When it comes to international markets, or emerging markets, findings, however, are not always in agreement. Besides supportive evidences found in research studies, such as Fama and French () for value effect in international markets, Wong () for size effect in a single emerging market like Singapore, Groot, Pang, and Swinkels () for value and size effect in a sample of twenty four most liquid frontier emerging markets, Hanauer and Linhart () for strong and highly significant value effect in four emerging market regions—Latin America, EMEA, Asia, and BRIC, or Ho and Chang () for liquidity effect in Chinese market etc., we also see evidences of the non‐existence of these effects in other research studies and other markets.…”

Fundamental Indexation in European Emerging Markets

“…Later on, Barry et al (2002), Kargin (2002), Rouwenhorst and Salomons (2003) have demonstrated benefits of stock selection based on value-related variables measures, like price-to-book ratio, price-to-earnings ratio or price-to-cash flow ratio for EEM investors. Also, the most recent studies confirm that the value premium is present in emerging markets, although it may vary from country to country (e.g., Dimson et al, 2014;Cakici et al, 2013;Lischewski and Voronkova, 2010;Hanauer and Linhart, 2015;Zaremba, 2015). Most recently, Zaremba and Czapkiewicz (2016) identified and replicated ten various value-oriented return-predictive signals in a very similar sample covering the Czech Republic, Hungary, Poland, Russia, and Turkey.…”

“…This may, in turn, additionally contribute to portfolio turnover and negatively impact the profitability of the portfolio. Finally, the fundamentally indexed portfolios are tilted towards value style, which proved very profitable in Emerging Europe (Cakici et al, 2013;Hanauer and Linhart, 2015;Zaremba, 2015). The exposure to the value factor may potentially result in an improved performance of the fundamentally weighted indexes and portfolios.…”

Common Risk Factors in Stock Returns in the MENA Region

“…They confirmed the existence of the value and momentum effects in all the 18 emerging markets, but not for Eastern Europe (no momentum). Hanauer and Linhart (2015) also used the Carhart model to examine four emerging market regions: Latin America, EMEA (Europe, the Middle East and Africa), BRIC (Brazil, Russia, India, and China) and Asia. They detected a strong evidence noting the effect of the value factor, but they had weak evidence noting the effect of the momentum factor in those regions.…”

“…Emerging markets have not been studied at the same level in detail despite the fact that emerging stock markets have an important role to play within the world portfolio. The importance of such emerging economies, and stock markets are constantly increasing (Hanauer & Linhart, 2015), hence such markets should not exist in obscurity.…”