The Success of Stock Selection Strategies in Emerging Markets: Is it Risk or Behavioral Bias?

35 Pages Posted: 20 Sep 2005

See all articles by Jaap van der Hart

Jaap van der Hart

ROBECO Group - Emerging Markets Team

Dick J. C. van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute; ERIM

Gerben J. de Zwart

APG Asset Management

Date Written: 29 2005 3,

Abstract

We examine competing explanations, based on risk and behavioral models, for the profitability ofstock selection strategies in emerging markets. We document that both emerging market risk and global risk factors cannot account for the significant excess returns of selection strategies based on value, momentum and earnings revisions indicators. The findings for value and momentum strategies are consistent with the evidence from developed markets supporting behavioral explanations. In addition, for value stocks, the most important behavioral biasappears to be related to underestimation of long-term growth prospects, as indicated by overly pessimistic analysts' earnings forecasts and above average earnings revisions for longer postformation horizons and by quite rapidly improving earnings growth expectations. Furthermore, we find that overreaction effects play a limited role for the earnings revisions strategy, as there is no clear return reversal up until five years after portfolio formation, setting this strategy apart from momentum strategies.

Keywords: value, momentum, earnings revisions, risk, behavioral models, overreaction, underreaction

JEL Classification: M, G3, G11, G15

Suggested Citation

van der Hart, Jaap and van Dijk, Dick J.C. and de Zwart, Gerben J., The Success of Stock Selection Strategies in Emerging Markets: Is it Risk or Behavioral Bias? (29 2005 3,). ERIM Report Series Reference No. ERS-2005-012-F&A. Available at SSRN: https://ssrn.com/abstract=797938

Jaap Van der Hart

ROBECO Group - Emerging Markets Team ( email )

P.O. Box 973
3000 AZ Rotterdam
Netherlands

Dick J.C. Van Dijk (Contact Author)

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute

P.O. Box 1738
3000 DR Rotterdam
Netherlands

ERIM ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1263 (Phone)
+31 10 4089162 (Fax)

HOME PAGE: http://people.few.eur.nl/djvandijk

Gerben J. De Zwart

APG Asset Management ( email )

P.O. Box 75283
Amsterdam, 1070 AG
Netherlands
+31-20-6048182 (Phone)

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