Do Quantitative Country Selection Strategies Really Work?

Abstract

Our study tests and compares 16 distinct country selection strategies based on inter-market value, size, momentum, quality and volatility effects within a sample of 78 countries for the period 1999-2014. By accounting for country-specific dividend tax rates, market liquidity and openness for investment flows, we design portfolios and assess their performance with asset pricing models. We find that the value strategies based on earnings to price ratio prove useful for investors, while momentum strategies should be approached with caution, as they appear effective only in small markets and may lead to loses in large markets. Selecting low leveraged and illiquid countries also proves profitable. Finally, while the relation between volatility and returns remains strong, it displays different characteristics for open and closed economies. Most return patterns are uneven and abnormal returns result from investments in extreme markets.

Keywords: value, size, momentum, quality, volatility, country-level effects, inter-market effects, cross-section of returns, factor returns, international diversification, asset pricing

JEL Classification: G11, G12, G15