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

Adam Zaremba () and Laura Andreu

International Review of Financial Analysis, 2018, vol. 56, issue C, 181-192

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.

Keywords: Trading costs; Exchange traded funds; Country equity indices; Quantitative strategies; International investment; Return predictability; Equity anomalies; Cross-section of returns (search for similar items in EconPapers)
JEL-codes: G12 G15 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1057521918300395
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:56:y:2018:i:c:p:181-192

DOI: 10.1016/j.irfa.2018.01.007

Access Statistics for this article

International Review of Financial Analysis is currently edited by B.M. Lucey

More articles in International Review of Financial Analysis from Elsevier
Bibliographic data for series maintained by Catherine Liu ().