Momentum trading strategies often deliver positive average returns in emerging-market equities, but effectiveness depends on implementation, local frictions, and cyclical risks. Empirical research shows that momentum is a pervasive phenomenon across countries and asset classes, yet real-world execution in emerging markets faces distinct challenges that affect net performance.
Evidence from cross-country studies
Geert Rouwenhorst Yale School of Management documented early evidence that momentum profits extend beyond the United States into international equity markets, including emerging markets. Cliff Asness AQR Capital Management, Tobias Moskowitz Yale School of Management, and Lasse Pedersen Copenhagen Business School later reinforced that momentum works across many asset classes and geographies, indicating a systematic return premium rather than a U.S.-only anomaly. These academic findings establish a baseline of credibility for momentum in emerging-market equities. At the same time, analyses by institutions such as the World Bank and the International Monetary Fund highlight higher trading costs, lower liquidity, and regulatory constraints in many emerging markets that can erode gross momentum returns.
Causes and constraints
The persistence of momentum is generally attributed to behavioral drivers like investor underreaction to information and slow diffusion of news, combined with limits to arbitrage that prevent immediate exploitation. In emerging markets, information asymmetry and concentrated ownership structures amplify these effects. However, constraints such as high transaction fees, wider bid-ask spreads, short-sale restrictions, capital controls, and episodic political or macroeconomic shocks increase implementation risk. These factors can transform theoretical momentum profits into much smaller or even negative net returns once execution costs and slippage are included.
Consequences and practical nuance
For practitioners, the practical consequence is that momentum strategies in emerging equities can outperform benchmarks but require tailored risk management. Portfolio managers commonly reduce turnover, focus on more liquid segments, implement currency hedges, and diversify across countries to manage idiosyncratic crashes and crowding. Cultural and territorial nuances matter: markets dominated by retail trading or state ownership behave differently from deep institutional markets, and holiday calendars, settlement conventions, and disclosure practices affect signal reliability. Investors should treat momentum in emerging markets as a conditional opportunity that demands rigorous transaction-cost analysis, dynamic risk controls, and sensitivity to local institutional features, rather than a guaranteed source of excess return.