Prior Return Patterns in Sector Returns: Evidence for Emerging Markets
Abstract
In this paper, we examine if there are any prior return patterns for sector returns for BRICKS markets from January 1993 to February 2008. For short-term portfolio formation windows (up to 12 months), India and S.Africa report momentum behavior while South Korea reports reversals. For long-term formation windows (up to 60 months), Brazil exhibits momentum patterns which disappear for 60-12-12 strategies. India and Russia momentum patterns continue even for long-term portfolio formation windows South Korea, South Africa and China show weak reversals for long-term portfolio formation windows. We construct a sector factor based on Liu and Zhang (2008) argument that winner sector exhibit higher risk owing to stronger growth potential. We observe that a large part of prior return patterns in stock returns are absorbed by similar patterns in sector returns. Our findings shall be useful for portfolio managers and academicians with better insights about prior return patterns in sector data. The study contributes to the asset pricing and behavioral finance literature for emerging markets.
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