Jose Menchero and Andrei Morozov
In this article, we investigate the relative strength of industry versus country effects in the global equity markets over the sample period 1994–2010. In particular, we examine three market segments: (a) the world market, (b) emerging markets, and (c) developed Europe. We employ a factor-based approach to construct portfolios that capture the “pure” effect of each industry or country. We define two quantities to measure the relative strength of the two effects: diversification potential and mean absolute deviation. For the world market, we find that industry and country effects are of comparable strength, although each dominates during different subperiods. In particular, countries dominated in the mid-to-late 1990s, whereas industries dominated in the aftermath of the internet bubble. For emerging markets, we find that countries have dominated industries over the entire sample period. In developed Europe, by contrast, we find that industries have dominated countries since the introduction of the euro. We also investigate the size dependency of the relative strength of industry versus country effects. In particular, we find that in the small-cap segment, industry effects become weaker whereas country effects retain their full strength.