Paper profits or real money? Trading costs and stock market anomalies in country ETFs

Adam Zaremba , Laura Andreu

Abstract

Are the quantitative equity strategies for country selection robust to implementation costs? To answer this question, we conduct a comprehensive examination of the country-level strategies so far. We review, classify, and replicate 120 equity anomalies within a sample of 42 country equity indices for the years 1996–2017. Next, using ETF price and spread data, we test the effect of real-life conditions and trading costs on the anomaly performance. We also examine three cost-mitigation strategies: infrequent rebalancing, capitalization-based weighting, and focus on low-cost securities. We find that 46% of the long-only monthly rebalanced anomaly portfolios display significant alphas, concentrated strongly among strategies based on value, momentum, and liquidity. The effect of transaction costs proves largely lethal to returns, leaving only a handful of anomalies profitable. Less frequent rebalancing (annually) helps to regain the effectiveness of the strategies, increasing the monthly alphas on the long-only anomaly portfolios to 0.44% on average.
Author Adam Zaremba (WZ / KIiRK)
Adam Zaremba,,
- Department of Investment and Capital Markets
, Laura Andreu - University of Zaragoza, Spain
Laura Andreu,,
-
Journal seriesInternational Review of Financial Analysis, ISSN 1057-5219, (A 20 pkt)
Issue year2018
Vol56
Pages181-192
Publication size in sheets0.55
Keywords in EnglishTrading costs, Exchange traded funds, Country equity indices, Quantitative strategies, International investment, Return predictability, Equity anomalies, Cross-section of returns
ASJC Classification2002 Economics and Econometrics; 2003 Finance
DOIDOI:10.1016/j.irfa.2018.01.007
URL https://doi.org/10.1016/j.irfa.2018.01.007
Languageen angielski
Score (nominal)20
Score sourcejournalList
ScoreMinisterial score = 20.0, 09-03-2020, ArticleFromJournal
Publication indicators WoS Citations = 2; Scopus SNIP (Source Normalised Impact per Paper): 2018 = 1.193; WoS Impact Factor: 2017 = 1.566 (2) - 2017=1.729 (5)
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