Quantitative Investment Strategies in LatAm Equity Markets: Challenging the Efficient Market Hypothesis (EMH)

Using LatAm data from 2000 to 2018, this research investigates asset pricing anomalies that have been found to generate outperformance globally. Specifically, we examine the Value, the Momentum, the Low Volatility, and the Quality anomaly in Brazil, Mexico, Chile, Peru, and Colombia. All anomalies are found to be profitable, but Value and Momentum are the strongest in these markets. Alternative definitions for the effects generate higher expected returns and lower standard deviations than the traditional ones. The performance of singlefactor portfolios can be enhanced by combining two or more anomalies simultaneously, and the portfolio blending approach is the best method to multi-factor portfolio construction. We find that a dynamic asset allocation strategy, leveraged by the concept of Absolute Momentum, can significantly improve the Sharpe ratio of multi-factor portfolios and reduces the exposure to extremely adverse events. It also makes the distribution of monthly returns to be positively skewed. Finally, we show that single- and multi-factor portfolios may have long periods of bad performance, while a dynamic asset allocation strategy to multi-factor portfolios performs well in all business cycles.