On the returns generating process and the profitability of trading rules in emerging capital markets

In this paper, we aim to characterize the stock return dynamics of four Latin American and four Asian emerging capital market economies and assess the profitability of popular trading rules. Using Morgan Stanley Capital International (MSCI) daily stock index prices, we find that dollar denominated returns exhibit statistically significant long-memory effects in volatility but not in the mean. "Trading" our findings via a number of rules, we beat the "buy-and-hold" benchmark strategy in all markets before transaction costs and, predominantly, in Asian markets after transaction costs. The robustness of our results casts serious doubt on the weak form efficiency of such markets. (c) 2007 Elsevier Ltd. All rights reserved.