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Risk-based explanation for the country-level size and value effects

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  • Zaremba, Adam

Abstract

The present study provides a risk-based explanation for the country-level size and value effects. The research demonstrates that the small-country effect is fully explained by cross-sectional variation in the country risk. Furthermore, accounting for the country risk decreases the alphas on value strategies by approximately 30%, making them statistically insignificant. The results are robust to the affect of taxes on dividends, alternative risk measures, and changes in sorting variables used to implement the strategies examined. The phenomenon is particularly pronounced in emerging markets.

Suggested Citation

  • Zaremba, Adam, 2016. "Risk-based explanation for the country-level size and value effects," Finance Research Letters, Elsevier, vol. 18(C), pages 226-233.
    • Handle: RePEc:eee:finlet:v:18:y:2016:i:c:p:226-233
    DOI: 10.1016/j.frl.2016.04.020
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    Citations

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    Cited by:

    1. Adam Zaremba, 2019. "The Cross Section of Country Equity Returns: A Review of Empirical Literature," JRFM, MDPI, vol. 12(4), pages 1-26, October.
    2. Gkillas, Konstantinos & Boako, Gideon & Vortelinos, Dimitrios & Vasiliadis, Lavrentios, 2020. "Non-parametric quantile dependencies between volatility discontinuities and political risk," Finance Research Letters, Elsevier, vol. 32(C).
    3. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, March.
    4. Zaremba, Adam & Andreu, Laura, 2018. "Paper profits or real money? Trading costs and stock market anomalies in country ETFs," International Review of Financial Analysis, Elsevier, vol. 56(C), pages 181-192.
    5. Zaremba, Adam & Umutlu, Mehmet, 2018. "Size matters everywhere: Decomposing the small country and small industry premia," The North American Journal of Economics and Finance, Elsevier, vol. 43(C), pages 1-18.
    6. Zaremba, Adam & Karathanasopoulos, Andreas & Maydybura, Alina & Czapkiewicz, Anna & Bagheri, Noushin, 2020. "Dissecting anomalies in Islamic stocks: Integrated or segmented pricing?," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).
    7. Zaremba, Adam & Umutlu, Mehmet & Maydybura, Alina, 2020. "Where have the profits gone? Market efficiency and the disappearing equity anomalies in country and industry returns," Journal of Banking & Finance, Elsevier, vol. 121(C).
    8. Söhnke M. Bartram & Harald Lohre & Peter F. Pope & Ananthalakshmi Ranganathan, 2021. "Navigating the factor zoo around the world: an institutional investor perspective," Journal of Business Economics, Springer, vol. 91(5), pages 655-703, July.

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    More about this item

    Keywords

    Value premium; Size premium; Small-market effect; Country selection strategies; Country-level anomalies; International asset pricing; Pricing of risk; Country risk;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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