Momentum and Reversal Puzzle in Emerging Markets

Icfai Journal of Behavioral Finance, Forthcoming

Posted: 13 Jun 2008

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Empirical research about the existence of momentum and reversal phenomena in Emerging Stock Markets shows that momentum profits are in general positive but not always economically and statistically significant. This paper re-examines the momentum and reversal phenomena in 15 emerging markets, using data from 1995 to 2005. Our results are quite different from previous literature: we found significant evidence of reversals in most of the Emerging Stock Markets analysed, even when controlled for systematic risk and size. There are many possible explanations for this puzzle. One common interpretation for the momentum phenomenon in the short-term is the slow information diffusion, leading to an underreaction in the markets. Therefore, it is possible that the times of slow diffusion are over, and that faster diffusion and a huge amount of information available in recent years are leading to overconfidence and overreaction, and thus momentum phenomenon may have disappeared. Another interpretation, perhaps complementary with the previous one, is that the introduction of Internet brokers is making stock trading more and more easily and widely available for small individual investors. And as these small investors tend to have a behaviour driven by the disposition effect and engage in contrarian strategies, this may lead to reversals in stock returns.

Keywords: Emerging Markets, Reversal, Momentum

JEL Classification: G14, G15

Suggested Citation

Ornelas, Jose Renato Haas and Fernandes, Jose Luiz Barros, Momentum and Reversal Puzzle in Emerging Markets. Icfai Journal of Behavioral Finance, Forthcoming, Available at SSRN:

Jose Renato Haas Ornelas (Contact Author)

Banco Central do Brasil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distrito Federal 70074-900


Jose Luiz Barros Fernandes

Universidade de Brasília ( email )

Campus Universitário Darcy Ribeiro
Brasília, Distrito Federal 70910-900

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