Style Timing in Emerging Markets

Abstract

Historical evidence suggests that relative-value and relative-strength strategies have cycled in and out of favor in emerging country selection. As such, style timing appears potentially rewarding. A risk-aversion proxy could be useful to distinguish between times when relative-value or relative-strength strategies outperform. The authors propose a criterion for style timing supported by psychological evidence that prior results affect subsequent risk-taking behavior. The authors find that a strategy using a relative-value (relative-strength) indicator following negative (positive) market performance presents consistent risk-adjusted performance that is superior to that resulting from either the relative-value or relative-strength strategies.