Momentum and Downside Risk in Emerging Markets

Abstract

Momentum strategies have been shown to be robust across asset classes and time periods. The authors examine the momentum effect in an updated sample of emerging markets and show that a zero-cost strategy that purchases past winners and sells past losers generates significantly positive returns in an overwhelming majority of countries. Momentum returns tend to be higher than aggregate returns in terms of their averages, Sharpe ratios and alphas. On the flip side, momentum strategy returns are negatively skewed and negatively exposed to the market consistent with crash behavior documented in the literature. The authors calculate performance measures that scale mean returns by various downside risk metrics and find that the momentum strategy continues to outperform local market indices even after this adjustment.

Keywords: momentum, downside risk, emerging markets, performance measurement

JEL Classification: G11, G12, G15