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Contribution Details

Type Master's Thesis
Scope Discipline-based scholarship
Title Risk and Return of Value-Based Country Selection Strategies
Organization Unit
Authors
  • Christian Egolf
Supervisors
  • Tim Glaus
Language
  • English
Institution University of Zurich
Faculty Faculty of Business, Economics and Informatics
Number of Pages 180
Date 2018
Zusammenfassung The research on value invest, having started with Graham and Dodd (1934) is extensive and covers the most part of the last century. What started with a book on security analysis became soon one of the most famous anomaly and return factor in the well-known Fama French three-factor model (Fama and French (1992)). While this risk or return premium is based on companies’ book-to-market ratio there is also evidence for other metrics such as price-to-earnings (Nicholson (1960)), price-to-free cash flow (Asness et al. (2015)) and the price-to-dividend ratio (De Groot, Pang and Swinkels (2012)). The research is further extended to emerging markets and other asset classes (Asness, Moskowitz and Pedersen (2013)). Others studied value investing more in the sense of Graham (1973) by adding a quality measure (Novy-Marx (2013)). With the emergence of exchange traded funds it has become relatively simple for an ordinary investor to implement a value strategy in his portfolio as there are ETFs based on value, whether they carry it also as a name or call themselves Smart Beta ETFs. But what most of these funds and the above research have in common is that they are based on single stocks. Another body of academic research, despite being rather small, tested whether value investing could also be applied to selecting countries’ stock markets. The first papers emerged in the early 90s with Keppler (1991) who shows that selecting developed countries with low price-to-cash flow ratios beats the market. Heckman, Mullin and Sze (1996) provide evidence for an outperformance based on P/B, P/E, P/D and P/CF for developed and emerging countries from 1974 to 1994. Angelidis and Tessaromatis (2017) lastly, cover the same ratios for a sample of 23 developed and 21 emerging markets from 1980 to 2015 and report excess returns compared to the market and an equally high alpha using the Capital Asset Pricing Model. The previous literature on value-based country selection strategies is scarce and while covering different value ratios and also emerging markets it neglects frontier markets and mostly implementation restrictions. The aim of this thesis is to test whether the reported outperformance persists in a global sample and single markets including frontier markets. Furthermore, the returns should be analyzed with a factor model using country-level factors constructed for each sample separately. In a last step the strategies should be implemented using ETFs based on the previously used country indices to show whether investors could have realized any abnormal returns using the country selection strategies.
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