Cross-Sector Style Analysis Of Global Equities

Abstract

Value effect, size effect, mean reversal of long-term losers and the momentum of short-term winners are well-documented efficient market anomalies that exist in the cross-section of equity returns. Prior literature suggests that investing in stocks that have relatively higher beta, higher book-to-market ratio, lower market capitalization, higher prior 12-month returns and lower prior 36-month returns can reap above-average returns. Stocks possessing these investment styles are either riskier, or subject to investor overreaction. This paper undertakes to examine these anomalies across different sectors of the global equity market. The results of the univariate analysis show that market capitalization, book-to-market ratio and market beta are prominent factors that consistently explain the cross-section of global equity returns over the period from 01 January 1999 to 31 December 2009. Basic materials and oil and gas sector is the best performing sector while financials and technology sectors are the worst performing sectors on a risk-adjusted return basis over the examination period. Examination of the log cumulative style payoffs suggests that the value effect and mean reversals are particularly strong across sectors during turbulent times. The close resemblance of the cumulative payoffs to prior 12- and 36-month returns for the consumers goods and services and industrials sectors, as opposed to the widening gaps between the cumulative payoffs to prior 12- and 36-month returns for the technology sector, are possibly due to the relatively tighter competition and higher turnover rates for market leaders in the technology sector.