Combining Equity Country Selection Strategies
42 Pages Posted: 10 Jun 2015 Last revised: 27 Jan 2017
Date Written: July 10, 2015
The recent increase in passive investment products has given investors easy access to international markets. The basic motivation of this paper is to offer new tools to investors who want to allocate assets across countries. This study investigates the performance of equity country selection strategies based on a combination of theoretically and empirically motivated variables. Thus, we create portfolios and assess their performance using asset pricing models. The empirical examination is based on data from 78 countries from the years 1999 to 2015. The strategies that are based on the earnings-to-price (EP) ratio, the turnover ratio, and skewness prove to be useful tools for international investors. Furthermore, portfolios from sorts on blended rankings of skewness combined with the EP ratio or the turnover ratio are also characterized by an attractive risk-return ratio. However, joint strategies do not outperform strategies that are based on single metrics. As a result, we argue that investors would be better off building a diversified portfolio rather than combining their options into one strategy because of the low correlation among returns on single-variable strategies.
Keywords: country selection strategies, asset pricing, cross section of stock returns, value investing, momentum, skewness preference, liquidity premium, turnover ratio, international investments
JEL Classification: G11, G12, G15
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