Local Return Factors and Turnover in Emerging Stock Markets

Abstract

The paper shows that the factors that drive cross-sectional differences in expected stock returns in emerging equity markets are qualitatively similar to those that have been found in developed equity markets. In a sample of more than 1700 firms from 20 countries, I find that emerging market stocks exhibit momentum, small stocks outperform large stocks, and value stocks outperform growth stocks. There is no evidence that high beta stocks outperform low beta stocks. A Bayesian analysis of the return premiums shows that the combined evidence of developed and emerging markets strongly favors the hypothesis that similar return factors are present in markets around the world. Finally, the paper documents a strong cross-sectional correlation between the return factors and share turnover. Yet, it is unlikely that liquidity can explain the emerging market return premiums.

JEL Classification: G15, G11, G12