Getting More Value out of the Value Factor

Abstract

This article provides a model for predicting whether value stocks will outperform growth stocks and whether value stocks’ outperformance will be positively or negatively correlated with equity markets. The model’s intuition is that value stocks tend to perform best when 1) markets are performing well, 2) analysts are optimistic about long-term earnings growth, 3) volatility is low, and 4) markets are relatively expensive. The authors also find that the relationship between value stocks’ outperformance and equity market returns is more positive when analysts are less optimistic about long-term earnings growth. Investors may be able to improve their factor returns and reduce their portfolio volatility by dynamically calibrating their value stock factor exposures.

TOPICS: Security analysis and valuation, analysis of individual factors/risk premia, performance measurement