Abstract
The last three decades brought mounting evidence regarding the cross-sectional predictability of country equity returns. The studies not only documented country-level counterparts of well-established stock-level anomalies, such as size, value, or momentum, but also demonstrated some unique return-predicting signals such as fund flows or political regimes. Nonetheless, the different studies vary remarkably in terms of their dataset and methods employed. This study aims to provide a comprehensive review of the current literature on the cross-section of country equity returns. We focus on three particular aspects of the asset pricing literature. First, we study the choice of dataset and sample preparation methods. Second, we survey different aspects of the methodological approaches. Last but not least, we review the country-level equity anomalies discovered so far. The discussed cross-sectional return patterns not only provide new insights into international asset pricing but can also be potentially translated into effective country allocation strategies.
Highlights
The last three decades brought an unprecedented growth of exchange traded funds (ETFs) and index funds, which enable investors to quickly move their capital around the world
Already in 2017, the assets under management of ETFs exceeded five trillion U.S dollars, and the compound annual growth rate over the past four years amounted to almost 19% (Lord 2018)
In asset pricing studies in particular, examinations of the close-to-century long datasets make it possible to check the true robustness of the return patterns and secure against the risk of false discoveries and data mining
Summary
The last three decades brought an unprecedented growth of exchange traded funds (ETFs) and index funds, which enable investors to quickly move their capital around the world. Recent surveys documented literally hundreds of different equity anomalies (e.g., Harvey et al 2016; Hou et al 2018) Many of these cross-sectional patterns, such as value, momentum, or seasonality, have their parallels at the inter-market level and could be potentially used for country allocation. The studies documenting numerous country-level equity anomalies provide new insights into international asset pricing but can be translated into efficient country allocation strategies. Our survey considers data sources and preparation, research methods, and, last but not least, the cross-sectional return patterns documented in the country-level equity returns.
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