Strategies Can Be Expensive Too! The Value Spread and Asset Allocation in Global Equity Markets

Abstract

Is the value spread useful for forecasting returns on quantitative equity strategies for country selection? To test this, we examine a sample of 120 country-level equity strategies replicated within 72 stock markets for the years 1996–2017. The value spread is a powerful and robust predictor of strategy returns in the cross-section, subsuming other methods based on momentum, reversal, or seasonality. Going long (short) the strategies with the broadest (narrowest) value spread produces significant four-factor model alphas, markedly outperforming an equal-weighted benchmark of all of the strategies. The results are robust to many considerations.

Keywords: value spread, country-level anomalies, country-selection strategies, asset allocation, asset pricing, international investment, return predictability, equity anomalies, the cross-section of returns

JEL Classification: G12, G15