Revisiting Momentum Profits in Emerging Markets

Abstract

This study investigates the cross-sectional and time-series properties of momentum returns in 19 emerging market countries. In general, consistent with previous studies, momentum strategies in emerging markets underperform those in the U.S. and other developed markets. To help reconcile these differences, we show that momentum profits are negatively exposed to market and liquidity factors, which is more important in down market states. Given higher market returns and lower liquidity in emerging markets, this negative exposure tends to increase momentum crashes when market rebounds after depressed market conditions and, in turn, lower momentum returns in emerging market countries. Finally, risk management of momentum reduces exposure to market and liquidity factors, thereby boosting returns, Sharpe ratios, and asset pricing model alphas.

Keywords: emerging markets, liquidity, momentum, risk management

JEL Classification: G11, G12