Quality Investing and the Cross-Section of Country Returns
Studies in Economics and Finance, 2016, vol. 33, no. 2
30 Pages Posted: 27 Dec 2013 Last revised: 10 May 2016
Date Written: May 30, 2015
The main objective of this study is to examine the role of quality as a determinant of a cross-sectional variation in country-level stock returns. The study attempts to address the question: Is there any special premium for top-quality stock markets with decent profitability, indebtedness and liquidity ratios? The computations are based on the listings of 66 country portfolios over the period between 2000 and 2013. Long/short country portfolios from sorts on characteristics related to quality are examined with asset pricing models. The inter-market variation in returns may be explained with profitability and debt ratios: the more profitable and the less indebted is stock market, the better is its performance. Moreover, the performance of country-level value, size and momentum strategies may be improved by double-sorting on quality characteristics. The practical implications include such issues as the global asset allocation, the development of investment products, asset pricing and investment performance measurement. The country selection strategies based on leverage and profitability prove a useful tool for investors with global investment mandate. Furthermore, additional sorting on quality metrics may markedly improve the performance of inter-market value, size and momentum strategies.
Keywords: quality investing, quality premium, profitability premium, international stock markets, cross-section of country returns, leverage
JEL Classification: G11, G12, G15
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