INVESTING IN AN EMERGING MARKET: Systematic risk and fund performance in Russian stock market

In this paper, we study systematic risk factors that influence returns in the Russian stock market and investigate how Swedish Russia and Eastern Europe funds have performed and managed their portfolio holdings in an emerging market environment. We find that the Russian stock markets exposure to systematic risk in other emerging markets is high and significant. Commodity risk and global currency risk are also important, although subjects to strong time variation, which persists cross sectors. Swedish Russia and Eastern Europe funds manage these risk factors by reducing their overall portfolio holdings exposure to the systematic market risk. This enables them to over perform the market index and generate positive excess returns, mainly through long-term strategic investment decisions.

Contents

1 Introduction
2 Previous findings
3 Analytical foundation
3.1 International investors in an emerging market
3.2 The systematic market risk
3.3 Fund performance evaluation
3.4 Evaluation of tactical and strategic decision
3.5 Reward to volatility
4 Description of data
4.1 Data sample
4.1.1 General presentation of the funds
4.1.2 Sector allocation
4.2 Collection and processing of data
4.2.1 Data collection
4.2.2 Data processing
4.3 Tests of the data set properties
5 Empirical evidence, analysis and discussion
5.1 Russian stock market’s exposure to global equity risk
5.2 The systematic risk factors
5.2.1 Russian market’s exposure to systematic risk factors
5.2.2 Russian sector markets’ exposure to systematic risk factors
5.2.3 Country risk in Russia
5.2.4 The funds’ exposure to systematic risk factors
5.3 Performance evaluation of Russia and Eastern Europe funds
5.3.1 Generation of excess returns
5.3.2 Excess returns from long-term investment decisions
5.3.3 Excess returns from short-term investment decisions
5.3.4 Sector portfolio analysis
5.3.5 Risk-adjusted performance evaluation
6 Concluding remarks
7 References
8 Appendices A-F

Author: Kristian Elonen, Saara Hollmén

Source: Stockholm School of Economics

INVESTING IN AN EMERGING MARKET: Systematic risk and fund performance in Russian stock market