Are Emerging Market Investors Overly Pessimistic in Extreme Risk-off Periods?

Jan Viebig

Journal of Behavioral Finance, 2015, vol. 16, issue 2, 163-172

Abstract: Motivated by Campbell and Shiller [2001], we ask if future returns and loss probabilities are predictable when markets trade at extremely low, depressed levels. In this paper we present empirical evidence that a predictable “undershooting phenomenon” exists in emerging markets. Depressed valuation ratios are a statistically significant predictor at the 99% level of confidence for future returns in most emerging markets. Overly anxious emerging market investors seem to overreact in periods of extreme stress and fear in financial markets.

Date: 2015
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DOI: 10.1080/15427560.2015.1034861

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