Risk-Based Explanation for the Country-Level Size and Value Effects

Finance Research Letters, Forthcoming

17 Pages Posted: 12 May 2016

See all articles by Adam Zaremba

Adam Zaremba

Montpellier Business School; Poznan University of Economics and Business; University of Cape Town

Date Written: March 31, 2016

Abstract

The present study provides a risk-based explanation for the country-level size and value effects. The research demonstrates that the small-country effect is fully explained by cross-sectional variation in the country risk. Furthermore, accounting for the country risk decreases the alphas on value strategies by approximately 30%, making them statistically insignificant. The results are robust to the affect of taxes on dividends, alternative risk measures, and changes in sorting variables used to implement the strategies examined. The phenomenon is particularly pronounced in emerging markets.

Keywords: Value Premium, Size Premium, Small-Market Effect, Country Selection Strategies, Country-Level Anomalies, International Asset Pricing, Pricing of Risk, Country Risk

JEL Classification: F30, G12, G15

Suggested Citation

Zaremba, Adam, Risk-Based Explanation for the Country-Level Size and Value Effects (March 31, 2016). Finance Research Letters, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2778037

Adam Zaremba (Contact Author)

Montpellier Business School ( email )

2300 Avenue des Moulins
Montpellier, Occitanie 34000
France

HOME PAGE: http://sites.google.com/view/adamzaremba

Poznan University of Economics and Business ( email )

al. Niepodległości 10
Poznań, 61-875
Poland

University of Cape Town

Cape Town
South Africa

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