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Can high trading volume and volatility switch boost momentum to show greater inefficiency and avoid crashes in emerging markets? The economic relationship in factor investing in emerging markets

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  • Teplova, Tamara
  • Tomtosov, Aleksandr

Abstract

Factor momentum and high volume separately work well in developed markets, but they have shown poor results in extremely volatile and illiquid emerging markets. Guided by the characteristics of illiquid markets, we combined momentum and high volume into a composite factor by a unique technique. The stability of momentum winners was improved by an increase in trading volume, which may reflect an inflow of foreign money. The problem of volatility and momentum crashes disappeared with the inclusion of a volatility switch for each stock in the portfolio. The daily calculation of volatility for a possible closing of the position for each stock is due to the spike volatility and a small number of liquid securities. This combination of factors allows us to capture significant inefficiency of a diversified market using Russia as an example and shed light on the puzzle of factor investing.

Suggested Citation

  • Teplova, Tamara & Tomtosov, Aleksandr, 2021. "Can high trading volume and volatility switch boost momentum to show greater inefficiency and avoid crashes in emerging markets? The economic relationship in factor investing in emerging markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 210-223.
    • Handle: RePEc:eee:quaeco:v:80:y:2021:i:c:p:210-223
    DOI: 10.1016/j.qref.2021.01.018
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    Cited by:

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    3. González-Sánchez, Mariano, 2022. "Asset pricing models in emerging markets: Factorial approaches vs. information stochastic discount factor," Finance Research Letters, Elsevier, vol. 46(PB).

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    More about this item

    Keywords

    Momentum; Trading volume; Factor investing; Emerging markets; Volatility switch; Multifactor strategy;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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