Few and Far Between: Why Pursuing Premiums at the Industry and Country Levels Does Not Add Value

Abstract

We study the size, value, profitability, and momentum premiums at the industry and country levels in developed and emerging markets. While sorting industries and countries on aggregate characteristics has produced a few reliable average return spreads, the corresponding abnormal returns relative to security-level factors are mostly unreliable or short-lived. Taking positions in industries and countries based on aggregate characteristics can lead to concentrations unjustified by an increase in expected returns and is ill-suited for capturing premium interactions. Using security-level sorts along with diversification considerations appears to be a more viable approach to pursuing higher expected returns.

Keywords: asset pricing, international financial markets

JEL Classification: G12, G15