Quality investing and the cross-section of country returns

Zaremba, Adam

doi:10.1108/sef-06-2014-0119

Cited by 7 publications

(7 citation statements)

References 48 publications

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“…The second sort variable for RMW is operating profit scaled by book equity while the same for investment is percentage growth in total assets. The second sort for the quality indicator is a combined quality ranking given by Zaremba (2016), which involves ranking stocks on nine financial ratios indicating profitability, liquidity and indebtedness. This definition scores over that given by Asness et al (2018) in that it is less data-intensive and can also be calculated for emerging market stocks which have a relatively shorter length of time series data.…”

Section: Methodsmentioning

confidence: 99%

“…However, the academic interest in this domain is relatively recent, at least partly due to the fact that quality does not have a universally acceptable definition. Nevertheless, academic studies such as Zaremba (2016) and Asness et al (2018) tried to test the importance of quality as an explanatory factor for stock returns and they have shown that a quality factor shows promise as an explanatory variable in the cross-section of stock returns. We utilise this factor because it is a relatively newer factor out of the ones that have been proposed in the literature and has undergone very limited testing across multiple countries, especially as a factor in the asset pricing model.…”

Section: Introductionmentioning

confidence: 99%

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Multi-factor asset pricing models in emerging and developed markets

Lalwani

Chakraborty

2019

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Purpose The purpose of this paper is to compare the performance of various multifactor asset pricing models across ten emerging and developed markets. Design/methodology/approach The general methodology to test asset pricing models involves regressing test asset returns (left-hand side assets) on pricing factors (right-hand side assets). Then the performance of different models is evaluated based on how well they price multiple test assets together. The parameters used to compare relative performance of different models are their pricing errors (GRS statistic and average absolute intercepts) and explained variation (average adjusted R2). Findings The Fama-French five-factor model improves the pricing performance for stocks in Australia, Canada, China and the USA. The pricing in these countries appears to be more integrated. However, the superior performance in these four countries is not consistent across a variety of test assets and the magnitude of reduction in pricing errors vis-à-vis three- or four-factor models is often economically insignificant. For other markets, the parsimonious three-factor model or its four-factor variants appear to be more suitable. Originality/value Unlike most asset pricing studies that use test assets based on variables that are already used to construct RHS factors, this study uses test assets that are generally different from RHS sorts. This makes the tests more robust and less biased to be in favour of any multifactor model. Also, most international studies of asset pricing tests use data for different markets and combine them into regions. This study provides the evidence from ten countries separately because prior research has shown that locally constructed factors are more suitable to explain asset prices. Further, this study also tests for the usefulness of adding a quality factor in the existing asset pricing models.

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Section: Methodsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Multi-factor asset pricing models in emerging and developed markets

Lalwani

Chakraborty

2019

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“…Quality construct in the equity context mainly relies on certain quality categories, including safety and profitability (e.g. Piotroski, 2000;Asness, Frazzini, & Pedersen, 2014;Zaremba, 2016;MSCI, 2012). Accordingly, we define the quality stock as the stock of the large firms that reveals both high profitability and safety measured by ROE and return volatility.…”

Section: Flight To Quality Behavior Inside the Stock Marketmentioning

confidence: 99%

Flight to Quality Existence in the Egyptian Stock Market: An Analysis of Stock Market, Quality Stock and Treasury Bills

Sedeek¹,

Elgiziry²

2020

AFR

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This paper examines the existence of the flight to quality phenomenon in the Egyptian stock market and highlights the role of quality stock and Treasury bills in mitigating the risk associated with the falling condition of the stock market. We used the return of market portfolio (EGX30), Treasury bill and quality sorted portfolio from January 2008 to December 2017. We employed the auto regressive distributed lag model (ARDL) to postulate both the co-movement between quality stock return and market portfolio return and the co-movement between Treasury bill return and market portfolio return. Our findings show no existence of flight to quality behavior in the Egyptian stock market, and quality stock is a good diversifier. Whereas, flight to quality behavior exists between the stock market and treasury bills in the crisis periods, and treasury bill can be used as stabilizing investment tool.

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“…Zaremba (2015, 2016) extends the concept of quality to country-level (as opposed to stock level) selection. His reported findings can be summarised as follows.…”

Section: Literature Reviewmentioning

confidence: 99%

“…Additional sorts on profitability and leverage significantly improved the performance of cross-national value strategies. The findings in Zaremba (2016) suggest that the inter-market variation in returns may be explained with profitability and debt ratios: the more profitable and the less indebted is the stock market, the better is its performance. Furthermore, the performance of country-level value, size and momentum strategies may be improved by additional sorting on quality parameters.…”

Section: Literature Reviewmentioning

confidence: 99%

Quality investing in the Indian stock market

Lalwani

Chakraborty

2018

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Purpose The purpose of this paper is to explore whether stock selection strategies based on four fundamental quality indicators can generate superior returns compared to overall market. Design/methodology/approach The sample of stocks comprises the constituents of BSE-500 index, which is a broad based index consisting of highly liquid stocks from all 20 major industries of the Indian economy. Portfolios are constructed on the basis of quality indicator rankings of companies and the returns of these portfolios are compared with the overall market. Excess returns on quality based portfolios are also determined using OLS regressions of quality portfolio returns on market, size, value and momentum factor returns. Findings The results suggest that two of the four quality strategies, namely Grantham Quality indicator and Gross Profitability have generated superior returns after controlling for market returns as well as common anomalies such as size, value and momentum. Combining value strategies with quality strategies do not yield any significant gains relative to quality only strategies. Practical implications For investors looking to invest in the Indian stock market for a long term, this study provides evidence on the performance of some fundamental indicators that can help predict long run stock performance. The findings suggest that investors can distinguish between high-performing and low-performing stocks based on stock quality indicators. Originality/value This is the first such study to look into the performance of quality investing in the Indian stock market. As most quality investing studies have been focussed on developed economies, this paper provides out-of-sample evidence for quality investing in the context of an emerging market.

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Quality investing and the cross-section of country returns

Cited by 7 publications

References 48 publications

Multi-factor asset pricing models in emerging and developed markets

Multi-factor asset pricing models in emerging and developed markets

Flight to Quality Existence in the Egyptian Stock Market: An Analysis of Stock Market, Quality Stock and Treasury Bills

Quality investing in the Indian stock market

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