IDEAS home Printed from https://ideas.repec.org/a/eee/quaeco/v80y2021icp210-223.html
   My bibliography  Save this article

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

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1062976921000387
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.qref.2021.01.018?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Eric Girard & Rita Biswas, 2007. "Trading Volume and Market Volatility: Developed versus Emerging Stock Markets," The Financial Review, Eastern Finance Association, vol. 42(3), pages 429-459, August.
    2. Malcolm Baker & Jeffrey Wurgler, 2006. "Investor Sentiment and the Cross‐Section of Stock Returns," Journal of Finance, American Finance Association, vol. 61(4), pages 1645-1680, August.
    3. Simon Gervais & Ron Kaniel & Dan H. Mingelgrin, 2001. "The High‐Volume Return Premium," Journal of Finance, American Finance Association, vol. 56(3), pages 877-919, June.
    4. Frazzini, Andrea & Pedersen, Lasse Heje, 2014. "Betting against beta," Journal of Financial Economics, Elsevier, vol. 111(1), pages 1-25.
    5. repec:bla:jfinan:v:53:y:1998:i:6:p:1839-1885 is not listed on IDEAS
    6. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
    7. Lokman Gündüz & Abdulnasser Hatemi-J, 2005. "Stock Price and Volume Relation in Emerging Markets," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 41(1), pages 29-44, January.
    8. repec:bla:jfinan:v:59:y:2004:i:3:p:1345-1365 is not listed on IDEAS
    9. Barberis, Nicholas & Shleifer, Andrei & Vishny, Robert, 1998. "A model of investor sentiment," Journal of Financial Economics, Elsevier, vol. 49(3), pages 307-343, September.
    10. Asness, Clifford & Frazzini, Andrea & Israel, Ronen & Moskowitz, Tobias J. & Pedersen, Lasse H., 2018. "Size matters, if you control your junk," Journal of Financial Economics, Elsevier, vol. 129(3), pages 479-509.
    11. Marcin Kacperczyk & Stijn Van Nieuwerburgh & Laura Veldkamp, 2014. "Time-Varying Fund Manager Skill," Journal of Finance, American Finance Association, vol. 69(4), pages 1455-1484, August.
    12. Xavier Gabaix & Parameswaran Gopikrishnan & Vasiliki Plerou & H. Eugene Stanley, 2007. "A Theory of Limited Liquidity and Large Investors Causing Spikes in Stock Market Volatility and Trading Volume," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 564-573, 04-05.
    13. Miller, Edward M, 1977. "Risk, Uncertainty, and Divergence of Opinion," Journal of Finance, American Finance Association, vol. 32(4), pages 1151-1168, September.
    14. Harrison Hong & Jeremy C. Stein, 1999. "A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets," Journal of Finance, American Finance Association, vol. 54(6), pages 2143-2184, December.
    15. Wang, Kevin Q. & Xu, Jianguo, 2015. "Market volatility and momentum," Journal of Empirical Finance, Elsevier, vol. 30(C), pages 79-91.
    16. R. David Mclean & Jeffrey Pontiff, 2016. "Does Academic Research Destroy Stock Return Predictability?," Journal of Finance, American Finance Association, vol. 71(1), pages 5-32, February.
    17. Grundy, Bruce D & Martin, J Spencer, 2001. "Understanding the Nature of the Risks and the," The Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 29-78.
    18. De Bondt, Werner F M & Thaler, Richard, 1985. "Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
    19. Barroso, Pedro & Santa-Clara, Pedro, 2015. "Momentum has its moments," Journal of Financial Economics, Elsevier, vol. 116(1), pages 111-120.
    20. Cakici, Nusret & Fabozzi, Frank J. & Tan, Sinan, 2013. "Size, value, and momentum in emerging market stock returns," Emerging Markets Review, Elsevier, vol. 16(C), pages 46-65.
    21. Clifford S. Asness & Tobias J. Moskowitz & Lasse Heje Pedersen, 2013. "Value and Momentum Everywhere," Journal of Finance, American Finance Association, vol. 68(3), pages 929-985, June.
    22. Blitz, David & Pang, Juan & van Vliet, Pim, 2013. "The volatility effect in emerging markets," Emerging Markets Review, Elsevier, vol. 16(C), pages 31-45.
    23. Avramov, Doron & Cheng, Si & Hameed, Allaudeen, 2016. "Time-Varying Liquidity and Momentum Profits," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 51(6), pages 1897-1923, December.
    24. Datar, Vinay T. & Y. Naik, Narayan & Radcliffe, Robert, 1998. "Liquidity and stock returns: An alternative test," Journal of Financial Markets, Elsevier, vol. 1(2), pages 203-219, August.
    25. Fama, Eugene F & French, Kenneth R, 1996. "Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
    26. Narasimhan Jegadeesh & Sheridan Titman, 2001. "Profitability of Momentum Strategies: An Evaluation of Alternative Explanations," Journal of Finance, American Finance Association, vol. 56(2), pages 699-720, April.
    27. van der Hart, Jaap & Slagter, Erica & van Dijk, Dick, 2003. "Stock selection strategies in emerging markets," Journal of Empirical Finance, Elsevier, vol. 10(1-2), pages 105-132, February.
    28. Hanauer, Matthias X. & Lauterbach, Jochim G., 2019. "The cross-section of emerging market stock returns," Emerging Markets Review, Elsevier, vol. 38(C), pages 265-286.
    29. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Umar, Muhammad & Mirza, Nawazish & Rizvi, Syed Kumail Abbas & Furqan, Mehreen, 2023. "Asymmetric volatility structure of equity returns: Evidence from an emerging market," The Quarterly Review of Economics and Finance, Elsevier, vol. 87(C), pages 330-336.
    2. Yamani, Ehab, 2023. "Return–volume nexus in financial markets: A survey of research," Research in International Business and Finance, Elsevier, vol. 65(C).
    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).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, December.
    2. Jiaqi Guo & Peng Li & Youwei Li, 2022. "What Can Explain Momentum? Evidence from Decomposition," Management Science, INFORMS, vol. 68(8), pages 6184-6218, August.
    3. Doron Avramov & Guy Kaplanski & Avanidhar Subrahmanyam, 2022. "Postfundamentals Price Drift in Capital Markets: A Regression Regularization Perspective," Management Science, INFORMS, vol. 68(10), pages 7658-7681, October.
    4. Subrahmanyam, Avanidhar, 2018. "Equity market momentum: A synthesis of the literature and suggestions for future work," Pacific-Basin Finance Journal, Elsevier, vol. 51(C), pages 291-296.
    5. Cakici, Nusret & Zaremba, Adam & Bianchi, Robert J. & Pham, Nga, 2021. "False discoveries in the anomaly research: New insights from the Stock Exchange of Melbourne (1927–1987)," Pacific-Basin Finance Journal, Elsevier, vol. 70(C).
    6. Asness, Clifford & Frazzini, Andrea & Israel, Ronen & Moskowitz, Tobias J. & Pedersen, Lasse H., 2018. "Size matters, if you control your junk," Journal of Financial Economics, Elsevier, vol. 129(3), pages 479-509.
    7. Kobana Abukari & Isaac Otchere, 2020. "Dominance of hybrid contratum strategies over momentum and contrarian strategies: half a century of evidence," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 34(4), pages 471-505, December.
    8. Sina Ehsani & Juhani T. Linnainmaa, 2019. "Factor Momentum and the Momentum Factor," NBER Working Papers 25551, National Bureau of Economic Research, Inc.
    9. Butt, Hilal Anwar & Kolari, James W. & Sadaqat, Mohsin, 2021. "Revisiting momentum profits in emerging markets," Pacific-Basin Finance Journal, Elsevier, vol. 65(C).
    10. David Hirshleife, 2015. "Behavioral Finance," Annual Review of Financial Economics, Annual Reviews, vol. 7(1), pages 133-159, December.
    11. Martin H. Schmidt, 2017. "Trading strategies based on past returns: evidence from Germany," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 31(2), pages 201-256, May.
    12. Virk, Nader Shahzad & Butt, Hilal Anwar, 2022. "Asset pricing anomalies: Liquidity risk hedgers or liquidity risk spreaders?," International Review of Financial Analysis, Elsevier, vol. 81(C).
    13. Tobias J. Moskowitz, 2021. "Asset Pricing and Sports Betting," Journal of Finance, American Finance Association, vol. 76(6), pages 3153-3209, December.
    14. Hannah Lea Hühn & Hendrik Scholz, 2018. "Alpha Momentum and Price Momentum," IJFS, MDPI, vol. 6(2), pages 1-28, May.
    15. Cederburg, Scott & O’Doherty, Michael S. & Wang, Feifei & Yan, Xuemin (Sterling), 2020. "On the performance of volatility-managed portfolios," Journal of Financial Economics, Elsevier, vol. 138(1), pages 95-117.
    16. Zhu, Zhaobo & Duan, Xinrui & Sun, Licheng & Tu, Jun, 2019. "Momentum and reversal: The role of short selling," Journal of Economic Dynamics and Control, Elsevier, vol. 104(C), pages 95-110.
    17. Heston, Steven L. & Sadka, Ronnie, 2008. "Seasonality in the cross-section of stock returns," Journal of Financial Economics, Elsevier, vol. 87(2), pages 418-445, February.
    18. Zaremba, Adam & Kizys, Renatas & Raza, Muhammad Wajid, 2020. "The long-run reversal in the long run: Insights from two centuries of international equity returns," Journal of Empirical Finance, Elsevier, vol. 55(C), pages 177-199.
    19. Baltzer, Markus & Jank, Stephan & Smajlbegovic, Esad, 2019. "Who trades on momentum?," Journal of Financial Markets, Elsevier, vol. 42(C), pages 56-74.
    20. Schäfer, Larissa, 2015. "Essays in banking and international finance," Other publications TiSEM 54db9c22-05fa-4444-97d5-1, Tilburg University, School of Economics and Management.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:quaeco:v:80:y:2021:i:c:p:210-223. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620167 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.