This study provides convincing evidence that stock markets with low capitalisation, low valuation ratios and high momentum tend to outperform country markets with high capitalisation, high valuation ratios and low momentum. Based on sorting procedures and cross-sectional tests conducted across 78 countries over the period 1999-2014, it has been found out that value, size and momentum effects at the country level are stronger across small and medium country markets than large ones. Thus, bearing in mind the declining benefits of international diversification observed in recent decades, it is recommended that investors include country-level factor premiums in their strategic asset allocation, without postponing them to further stages of an investment process. In addition, it has been shown that inter-market value, size and momentum effects may be used in multifactor asset pricing models, which well explain the variation in stock returns at the country level.
We examine the existence of herding by institutional investors, analysing whether herding measures are affected in a mixed scenario, where certain skilled managers can develop timing abilities, and others herd. Studying a sample of Spanish pension funds investing in European equities from 2002 to 2013, this paper contributes to the financial literature by considering the possible influence of a range of timing abilities in herding. The results show the existence of certain timing abilities and herding, being the herding phenomenon more evident at the beginning of the current crisis and after the financial restructuring process experienced in Spain since 2010. Nonetheless, the market equilibrium is not affected in the long term. Our results also display that herding measures vary when taking into account timing abilities, so traditional herding measures do not fully capture the existence of mixed scenarios.