Stock Selection Modeling and Portfolio Selection in Emerging Markets

Abstract

This article addresses stock selection modeling and portfolio selection and implementation in EMs. The authors view EM investing as a special case of global investing, demonstrating how stock-selection models in EMs with price momentum and forecasted earnings acceleration factors can enhance returns. The authors construct index-enhanced portfolios for EMs that offer superior return-to-risk ratios relative to domestic portfolios. Based on back test and in real-time performance, the authors show how an EM portfolio using forecasted earnings and price momentum anomalies can be developed, estimated, and implemented to generate statistically significant excess returns.