Emerging Market Stock Momentum Returns during US Economic Regimes

Abstract

In this article, the authors investigate the momentum exhibited by emerging market (EM) stocks in US macroeconomic regimes. Although EM markets are often viewed and invested in as a basket, they comprise countries that are distinct in terms of their response to macroeconomic dynamics. The unique behavior of EM countries can in turn be expected to affect the momentum behavior of EM stocks. To investigate the latter hypothesis, the authors analyze the momentum of a selection of EM markets during expansionary and contractionary regimes in the US economy. Because the United States is arguably the anchor economy for the global economic system, it is reasonable to assume that its dynamics influence investment strategies in EM markets. The goal of the present article is to examine the nature and extent of that influence. The authors frame their study using Hamilton’s well-known regime-switching model. Momentum returns are measured over different holding periods and are further adjusted using the CAPM and Fama–French asset pricing models. The results show that there is a high degree of variation in the degree to which individual EM momentum profits are generated in different macroeconomic states. The results may therefore provide some insight into the potential efficacy of using macroeconomic information to drive investment decisions in the EM space.

TOPICS: Security analysis and valuation, emerging markets, analysis of individual factors/risk premia, performance measurement

Key Findings

• ▪ Momentum profits in emerging markets vary widely across US macroeconomic regimes.

• ▪ Momentum profits in emerging markets are generally, but not always, higher in expansionary regimes.

• ▪ Differences in volatility help explain the varying performance of momentum in different emerging markets.