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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
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