Quality investing and the cross-section of country returns (2016)
Author(s):
Adam Zaremba (Department
of Investment and Capital Markets, Poznan University of Economics, Poznan,Poland)
Abstract:
Purpose
The main purpose of this study is to examine the role of quality
as a determinant of a cross-sectional variation in country-level stock returns.
The study attempts to address the question: Is there any special premium for
top-quality stock markets with decent profitability, indebtedness and liquidity
ratios?
Design/methodology/approach
The computations are based on the listings of 66 country
portfolios over the period between 2000 and 2013. Long/short country portfolios
from sorts on characteristics related to quality are examined with
asset-pricing models.
Findings
The inter-market variation in returns may be explained with
profitability and debt ratios: the more profitable and the less indebted is the
stock market, the better is its performance. Moreover, the performance of
country-level value, size and momentum strategies may be improved by double
sorting on quality characteristics.
Practical
implications
The practical implications include such issues as the global
asset allocation, the development of investment products, asset pricing and
investment performance measurement. The country selection strategies that are
based on leverage and profitability prove to be a useful tool for investors
with a global investment mandate. Furthermore, additional sorting on quality
metrics may markedly improve the performance of inter-market value, size and
momentum strategies.
Originality/value
This paper examines the role of quality metrics related to
financial leverage, profitability and liquidity in explaining the cross-sectional
variation in country returns.
Keywords:
Leverage, Quality
investing, Cross-section of
country returns, International
stock markets, Profitability
premium, Quality premium, G11, G12, G15
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