The study examines the pervasiveness of eight well-documented anomalies in global equity markets for the Australian stock market. After partitioning stocks into three size categories (micro, small and big), we find that none of the eight anomalies are pervasive across size groups in either sorts or cross-sectional regressions. The existence of size, value, profitability, asset growth and accruals anomalies is primarily attributable to micro-cap stocks. Momentum and asset growth predict the expected returns of big stocks, but momentum does not predict the returns on micro stocks, and asset growth does not matter for small stocks. Contrarian returns are largely explained by stock size and value dimensions. Evidence for the earnings growth anomaly contradicts the growth extrapolation hypothesis. By looking at the hedge portfolio returns of anomalies in different regimes, we also show that many anomalies tend to exist in bear markets rather than bull markets. This evidence contradicts the risk-based explanations for the existence of anomalies.

We provide one of the first comprehensive studies on out-of-sample stock returns predictability in Australia. While most of the empirically well-known predictive variables fail to generate out-of-sample predictability, we document a significant out-of-sample prediction in forecasting ahead one-year and, to a lesser extent, one-quarter future excess returns, using a combination forecast of variables. We also find improved asset allocation using the combination forecast of these predictors. The combining methods are useful in predicting sector premia. Specifically, a sector rotation strategy relying on the combining methods outperforms the market by 3.27% per annum on a risk-adjusted basis.

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Cross-region and cross-sector asset allocation decisions are one of the most fundamental issues in international equity portfolio management. Equity returns exhibit higher volatilities and correlations, and lower expected returns, in bear markets compared to bull markets. However, static mean-variance analysis fails to capture this salient feature of equity returns. We accommodate the nonlinearity of returns using a regime switching model across both regions and sectors. The regime-dependent asset allocation potentially adds value to the traditional static mean-variance allocation. In addition, optimal allocation across sectors provide greater benefits compared to international diversification, which is characterized by higher returns, lower risks, lower correlations with the world market and a higher Sharpe ratio.

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