Abstract:

The aim of this paper is to study return predictability in the emerging markets. After selection of a large number of factors which are likely to determinate future excess return, we estimate excess return using four models. The first model which we called benchmark model is the model adopted by Rapach and al. (2013). We demonstrated that the inclusion of additional factors increases the predictive power of this model and that the best model of predictability is different from a market to another. In order to better understand the dynamic of returns in the emerging markets, we developed a dynamic model and we demonstrated that the paste excess return explains future excess return in emerging markets. Our results show that returns in the emerging markets are predictable and that our models can explain up to 50% of the future returns in these markets.