Do quantitative country selection strategies really work?

Adam Zaremba and Przemysław Konieczka

Abstract

ABSTRACT

Our paper tests and compares sixteen distinct country-selection strategies based on inter-market value, size, momentum, quality and volatility effects within a sample of seventy-eight countries for the period 1999-2015. By taking a practitioner's standpoint and accounting for country-specific dividend tax rates, market liquidity and openness to investment flows, we design portfolios and assess their performance with asset-pricing models. We find that the two best-performing strategies are based on size and leverage, ie, small markets outperform large markets and low-leveraged markets outperform highly leveraged markets. The country level value and momentum strategies work only under selected weighting schemes and are not very robust. The relationship between the future returns and past volatility or quality is also weak and unreliable. Finally, all of the raw and abnormal returns become insignificant when we control for the capital market constraints and investigate the strategies only within open or closed economies.