Predicting Country Equity Returns: Data, Methods, and Empirical Evidence
This chapter aims to provide a comprehensive review of the current literature on the cross-section of country equity returns. It focuses on three particular aspects of the asset pricing literature. First, the choice of dataset and sample preparation metho
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9.1
Introduction
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. Currently, more easily than ever before, investors can relocate their equity allocation from Germany to Brazil or from Japan to South Africa. Not surprisingly, the ETF industry has been rising very rapidly. Already in 2017, the assets under management of ETFs exceeded five trillion US dollars, and the compound annual growth rate over the past four years amounted to almost 19% (Lord 2018). The growth of ETFs coincides with a structural change in the asset management and shift from active investing to passive investing. As of December 2017, passive fund accounted for 45% of the aggregate assets under management in the US equity funds, compared to less than 5% in 1995 (Anadu et al. 2018). This profound revolution requires a whole new set of tools for equity investors, who now focus much less on which stocks to choose than on which countries to allocate money in. The asset pricing literature produced a preponderance of trading signals, which help to predict the cross-section of individual stock returns. Recent surveys documented literally hundreds of different equity anomalies (e.g., Harvey et al. 2016; Hou et al. 2020). Notably, many of these cross-sectional patterns, such as value, momentum, or seasonality, have their parallels at the
A modified version of this chapter has been previously published in Zaremba (2019b). Adam Zaremba acknowledges support from the National Science Centre of Poland. This paper is a part of project No. 2016/23/B/HS4/00731 of the National Science Centre of Poland.
© The Author(s) 2020 T. Miziołek et al., International Equity Exchange-Traded Funds, https://doi.org/10.1007/978-3-030-53864-4_9
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inter-market level, and could be potentially used for country allocation. The last 30 years of asset pricing research produced mounting evidence regarding the cross-sectional predictability of country equity returns. The studies documenting numerous country-level equity anomalies not only provide new insights into international asset pricing but can also be translated into efficient country allocation strategies. Moreover, they are invaluable to practical investors. The studies of cross-section of country equity returns not only examined different return patterns but also employed different methodologies and data sources. Issues such as choice of the index provider, return computation methodology, or portfolio formation can visibly influence the results. The diversity of empirical design and data sources and preparation methods calls for systematic review and for introducing a structure into the methodological choices in the field of country-level asset pricing. The major objective of this chapter is to provide a comprehensive review of the current state of literature on the cross-section of country equity returns. In particular, our survey considers data sources and preparation,
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