Stock Market Dogs of the World?
June 26, 2013 - Technical Trading
Reversion-to-trend appears to hold in many financial markets. Is this concept exploitable for country stock markets? In their June 2013 paper entitled “Do ‘Dogs of the World’ Bark or Bite? Evaluating a Mean-Reversion-Based Investment Strategy”, David Smith and Vladimir Pantilei test a simple “Dogs of the World” strategy designed to exploit long-term reversion across the 45 developed and emerging country stock markets comprising the MSCI All Country World Index (ACWI). Specifically, at the end of year one of their sample period, they allocate one fifth of initial funds equally to the five country stock markets with the lowest returns that year and hold for five years. At the ends of each of years two, three, four and five, they similarly allocate one fifth of initial funds to the five worst-performing markets that year to become fully invested. At the end of each subsequent year, they replace the oldest portfolio holdings with the five equally weighted worst performers that year. The MSCI ACWI (MSCI Developed Markets Index) is the benchmark since its inception in 1988 (before 1988). All returns are in U.S. dollars. They focus on a long test with indexes but also conduct a shorter, more realistic test with exchange-traded funds (ETF) that track country stock markets (at the lowest available cost). Using monthly returns for 45 country stock market indexes as available since 1970 (most begin in the 1980s and 1990s) and for corresponding ETFs as available since 1996 (many are much younger) through 2012, they find that: Keep Reading