TY - JOUR
T1 - Predicting the performance of equity anomalies in frontier emerging markets
T2 - a Markov switching model approach
AU - Czapkiewicz, Anna
AU - Zaremba, Adam
AU - Szczygielski, Jan Jakub
PY - 2019
Y1 - 2019
N2 - Equity anomalies in frontier markets appear and disappear over time. This article aims to demonstrate the predictability of which of these transient anomalies will be profitable using a Markov switching model. To do so, we examine 140 equity anomalies identified in the literature using a unique sample of over 3,600 stocks from 23 frontier equity markets between 1997 and 2016. The application of a Markov switching model reveals that the time-series pattern of expected returns is dependent upon the type of anomaly; some anomalies become unprofitable over time whereas profitability increases in tandem with the development of a specific stock market for other types of anomalies. Results further indicate that forecasts of the next month’s return obtained from this model can translate into profitable investment strategies. We find that an anomaly selection strategy that relies on the model produces abnormal returns and outperforms a naïve benchmark that considers all the anomalies. We go onto demonstrate that our results are robust.
AB - Equity anomalies in frontier markets appear and disappear over time. This article aims to demonstrate the predictability of which of these transient anomalies will be profitable using a Markov switching model. To do so, we examine 140 equity anomalies identified in the literature using a unique sample of over 3,600 stocks from 23 frontier equity markets between 1997 and 2016. The application of a Markov switching model reveals that the time-series pattern of expected returns is dependent upon the type of anomaly; some anomalies become unprofitable over time whereas profitability increases in tandem with the development of a specific stock market for other types of anomalies. Results further indicate that forecasts of the next month’s return obtained from this model can translate into profitable investment strategies. We find that an anomaly selection strategy that relies on the model produces abnormal returns and outperforms a naïve benchmark that considers all the anomalies. We go onto demonstrate that our results are robust.
KW - emerging stock markets
KW - equity anomalies
KW - factor allocation
KW - frontier equity markets
KW - Markov switching model
KW - return predictability
UR - http://www.scopus.com/inward/record.url?scp=85072997975&partnerID=8YFLogxK
U2 - 10.1080/1331677X.2019.1653782
DO - 10.1080/1331677X.2019.1653782
M3 - Article
AN - SCOPUS:85072997975
VL - 32
SP - 3077
EP - 3093
JO - Economic Research-Ekonomska Istrazivanja
JF - Economic Research-Ekonomska Istrazivanja
SN - 1331-677X
IS - 1
ER -