Country factors vs industry factors
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Country Factors vs. Industry Factors. Stellar Asset Management Austin Kairnes Emre Kati Jae Hyun “Jacky” Lee David Russ Marika Schwartzman. Increasing Country Correlation. Declining trade barriers GATT/ WTO Trading Blocks (NAFTA) Falling transportation costs

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Country Factors vs. Industry Factors

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Country factors vs industry factors

Country Factors vs. Industry Factors

Stellar Asset Management

Austin Kairnes

Emre Kati

Jae Hyun “Jacky” Lee

David Russ

Marika Schwartzman


Increasing country correlation

Increasing Country Correlation

  • Declining trade barriers

    • GATT/ WTO

    • Trading Blocks (NAFTA)

    • Falling transportation costs

  • Increasing Economic Coordination

    • EMU

    • IMF


Our analysis

Our Analysis

  • Compare Mean-Variance Efficient Frontiers for

    • Country Portfolio (G7)

    • Industry Portfolio

    • Country-Industry Portfolio

      • 5 countries (US, UK, Germany, Japan, France)

      • 6 industries (banking, beverage/tobacco, construction, electronics, health, merchandising)

  • Test Trading Strategies for

    • Country Portfolio

    • Industry Portfolio


Country factors vs industry factors

The Efficient Frontiers


High industry correlations

High Industry Correlations


Potential explanation

Potential Explanation

The US is heavily weighted in all industries increasing industry correlation.


Fixed weight strategy

Fixed Weight Strategy

Country Portfolio

Industry Portfolio


Dynamic weight strategy

Dynamic Weight Strategy

Country Portfolio

Oil = mthly price diff GTS = global term struct LPB = local P/B ratio LTS = local term struct


Dynamic weight strategy1

Dynamic Weight Strategy

Industry Portfolio

USTBill = mthly change in 90 day GPB = P/B for MSCI


Final results

Final Results


Conclusions

Conclusions

  • Country effects are dominant but industry tilts can add value.

  • A portfolio diversified on both country and industry factors will outperform a one factor portfolio.

  • An active allocation strategy to take advantage of the diversification benefits will be the best.


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