Cost-efficient factor investing in emerging equity markets

Kay Stankov

Publications of Darmstadt Technical University, Institute for Business Studies (BWL) from Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL)

Abstract: When factor investing is applied to emerging equity markets, due to the universe’s illiquid structure, the market friction must be considered. Risk-adjusted on-paper returns of such strategies look particularly appealing, but significant implementation hurdles stand in their path. While factor investing has been well-examined in literature, research gaps remain. This dissertation undertakes three comprehensive studies to resolve existing research gaps concerning portfolio cost-efficiency regarding the trade-off between return and implementation costs in emerging equity markets. Various approaches for further improvement of this trade-off extend the research. The first study demonstrates a factor-based strategy in emerging markets and provides a better understanding of the above trade-off. Multiple sensitivity analyses present the benefits of a first cost-mitigation approach. The second study further seeks to understand equity portfolios’ return and cost dynamics in a macroeconomic context. Leading indicators from developed and emerging markets are utilized to forecast the near-term factor regime. This prediction is adaptively implemented into the portfolios, adds a timing component, and highly increases the cost-efficiency. The third study extends the efficacy of the researched cost-mitigation strategy by implementing the benefits of a stock liquidity prediction based on state-of-the-art machine learning models.

Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:dar:wpaper:138114

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