Emerging markets have done well recently: MSCI’s index of them has risen 3 per cent in US dollar terms since August. This alone is a reason for investors to stick with them for a while longer.
I say this because emerging markets are prone to momentum effects: rises are more likely than not to lead to further rises, and falls to further falls.
We can measure this easily. Imagine there were no momentum and that returns in one month were independent of those in the previous month. Market volatility would then rise with the square root of time: the volatility of two-month returns would be equal to the standard deviation of monthly returns multiplied by the square root of two, the standard deviation of three-month returns would be equal to that of monthly returns multiplied by the square root of three, and so on.