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Strategies Can Be Expensive Too! The Value Spread and Asset Allocation in Global Equity Markets

Last Updated on 10 February, 2024 by Rejaul Karim

In the dynamic realm of global equity markets, the paper “Strategies Can Be Expensive Too! The Value Spread and Asset Allocation in Global Equity Markets,” authored by Adam Zaremba and Mehmet Umutlu, delves into the intricacies of forecasting returns on quantitative equity strategies for country selection.

Unveiled in Applied Economics in 2018, this 39-page exploration traverses 72 stock markets, dissecting 120 country-level equity strategies from 1996 to 2017. At its core, the study reveals the value spread as a potent and robust predictor, overshadowing methods grounded in momentum, reversal, or seasonality.

Long-short strategy applications, based on the value spread, showcase significant four-factor model alphas, establishing their prowess against an equal-weighted benchmark. Amidst the nuanced landscape of asset allocation, this research unveils valuable insights into return predictability, equity anomalies, and the cross-section of returns.

Abstract Of Paper

Is the value spread useful for forecasting returns on quantitative equity strategies for country selection? To test this, we examine a sample of 120 country-level equity strategies replicated within 72 stock markets for the years 1996–2017. The value spread is a powerful and robust predictor of strategy returns in the cross-section, subsuming other methods based on momentum, reversal, or seasonality. Going long (short) the strategies with the broadest (narrowest) value spread produces significant four-factor model alphas, markedly outperforming an equal-weighted benchmark of all of the strategies. The results are robust to many considerations.

Original paper – Download PDF

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Author

Adam Zaremba
Montpellier Business School; Poznan University of Economics and Business

Mehmet Umutlu
Edinburgh Napier University, The Business School, Accounting and Finance Subject Group

Conclusion

In summary, the value spread emerges as a potent and resilient predictor of returns in the realm of quantitative equity strategies for country selection. The extensive analysis, spanning 72 stock markets over two decades, underscores its efficacy, surpassing alternative methods rooted in momentum, reversal, or seasonality.

The strategic deployment of long and short positions based on the breadth of the value spread yields noteworthy four-factor model alphas, exhibiting substantial outperformance compared to an equal-weighted benchmark.

These findings persist across various considerations, affirming the robustness of the value spread in informing asset allocation decisions within global equity markets. The study thus accentuates the significance of the value spread as a valuable tool for forecasting returns in the domain of country-level equity anomalies.

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FAQ

Q1: What is the primary focus of the paper, and what does it reveal about forecasting returns in global equity markets?

The paper focuses on forecasting returns in global equity markets, specifically within the context of quantitative equity strategies for country selection. It reveals that the value spread, as opposed to methods based on momentum, reversal, or seasonality, is a powerful and robust predictor of returns in the cross-section. The study spans 72 stock markets and analyzes 120 country-level equity strategies from 1996 to 2017.

Q2: How does the value spread compare to alternative methods, and what are the implications for long-short strategy applications?

The value spread outperforms alternative methods such as momentum, reversal, or seasonality in forecasting returns. Long-short strategy applications based on the value spread, where one goes long on strategies with the broadest value spread and short on those with the narrowest, result in significant four-factor model alphas. These long-short strategies exhibit substantial outperformance compared to an equal-weighted benchmark of all the strategies analyzed in the study.

Q3: What are the key takeaways regarding the value spread’s role in asset allocation within global equity markets, and how robust are the findings?

The study underscores the efficacy of the value spread in informing asset allocation decisions within global equity markets. The strategic deployment of long and short positions based on the breadth of the value spread consistently yields noteworthy four-factor model alphas, indicating its potential as a valuable tool for asset allocation. The findings are robust across various considerations, affirming the resilience and reliability of the value spread in the domain of country-level equity anomalies.

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