Empirical analysis of value and momentum strategies in BRIC stock markets

Abstract

Our Master’s thesis examines whether value and momentum strategy has been profitable in each of the BRIC countries, in the ten cross - BRIC country sectors and in BRIC as a whole from January 2002 to June 2019. We find that value strategy outperforms momentum strategy and premiums are higher in the sector level than in the country level. The highest value premium obtained is 2,10%, in oil and gas sector and the highest momentum premium obtained is 1,49%, in consumer services sector using overlapping holding periods. Furthermore, by conducting analysis between momentum premium and business cycles, we find that momentum strategy works better during expansionary periods than during recessionary period. Besides, it is possible to limit the losses by switching from a pure momentum strategy to a combination of value and momentum strategy during periods of momentum crashes. Using different asset pricing models, we find that some of the value, momentum strategies and the combination of value and momentum strategies generate positive and statistically significant alphas. We further conduct Fama-MacBeth two step regressions and find that risk premium related to small minus big factor is positive and risk premium related to liquidity factor is negative. We have contributed to the literature by examining value and momentum strategies for cross-BRIC country-sectors and by conducting volatility adjusted residual return momentum strategy for BRIC as a whole and for China. We find that in general, residual momentum strategy generates higher excess returns and Sharpe ratios compared with total return momentum strategy. Residual momentum strategy MOM9X3 for BRIC as a whole yields an excess return of 0.81% and residual momentum strategy MOM12X3 for China generates an excess return of 0.49%.