Journal : Value Investing Anomalies

© All Rights Reserved

Просмотров: 34

Journal : Value Investing Anomalies

© All Rights Reserved

- The Arms Index-En
- Value Investing
- Value Investing
- Interview with Guy Spier.pdf
- Selection Among Alternatives
- Content
- Third Point Q1 2010 Investor Letter
- S&P Letter on Google Stock Split
- Bca4040 Slm Unit 05
- Management Strategies and Dynamic Financial Analysis
- Carne Fact Sheet 06302013
- MYP Fact Sheet 3-31-08
- Chap025.rtf
- PUF Fact Sheet 3-31-08
- Bershire Hathaway Owner's Manual
- Fami Save n Learn
- Fmr July 2017
- jac tear sheet - january 2015 estimate
- Intro Tom MSci
- Types of Mutual Funds

Вы находитесь на странице: 1из 11

journal homepage: www.elsevier.com/locate/qref

Consistent Earner, and Recognized Value

Gregor Elze

University of Graz, Department of Statistic and Operations Research, Universtaetsstr. 15, 8010 Graz, Austria

a r t i c l e

i n f o

Article history:

Received 11 March 2010

Accepted 21 June 2010

Available online 6 July 2010

JEL classication:

G11

G12

G14

G19

a b s t r a c t

Empirical academic studies have consistently found that value stocks outperform glamour stocks and

the market as a whole. This article extends prevailing research on existing value anomalies. It evaluates

simple value strategies for the European stock market (compared to many other studies that test market

data on a country-by-country basis) as well as sophisticated multi-dimensional value strategies that also

include capital return variables (Consistent Earner Strategy) and momentum factors (Recognized Value

Strategy), the latter reconciling intermediate horizon momentum and long-term reversals of behavioral

nance theories. It can be shown that these enhanced value strategies can produce superior returns

compared to returns of the whole market or simple value strategies without capturing higher risks

applying traditional risk measures.

2010 The Board of Trustees of the University of Illinois. Published by Elsevier B.V. All rights reserved.

Keywords:

Behavioural Finance

Market Anomalies

Value Investing

1. Introduction

In their 1934 book, Security Analysis1 , Benjamin Graham and

David Dodd argued that out-of-favor stocks are sometimes underpriced in the marketplace, and that investors cognizant of this

phenomenon could capture strong returns. This philosophy is now

widely known as value investing. Although value investing has

taken many forms since its inception, it generally involves buying shares which appear underpriced based on some form(s) of

fundamental analysis. Value shares typically feature low price-tobook, price-to-earnings, or price-to-cash ow ratios, while glamour

stocks generally are characterized by valuation metrics at the opposite end of the spectrum.

As early as 1977, academic studies have used share price and

earning per share data to classify stocks into the value or glamour

categories and compare historical performance. Stocks with low

price-to-earnings multiples (often called value stocks) appear

to provide higher rates of return than stocks with high priceto-earnings ratios as rst shown by Nicholson (1960) and later

conrmed by Ball (1978), Basu (1977, 1983), and Fama and MacBeth

E-mail address: r elze@yahoo.com.

1

Graham and Dodd (2005).

(1973).2 De Bondt and Thaler (1985) obtain a similar result for their

contrarian strategy based on buying stocks with low past returns

because of the behavioral hypothesis of investor overreaction. A

stocks price-to-book value ratio has also been found to be a useful predictor of future returns. Fama and French (1992) concluded

that size and price-to-book value together provide considerable

explanatory power for future returns in U.S. markets.

These results raised questions about the efciency of the market if one accepts the capital asset pricing model, as Lakonishok,

Schleifer and Vishny pointed out. In 1994, they published Contrarian Investment, Extrapolation, and Risk3 . Using data from

1968 to 1994, they grouped U.S. stocks into value and glamour

segments based on price-to-book, price-to-cash ow, and price-toearnings ratios, as well as sales growth. The researchers concluded

that, for a broad range of denitions of value and glamour,

value stocks consistently outperformed glamour stocks by wide

margins.

In their 1998 study, Value versus Growth: The International

Evidence, Fama and French tackled the question of whether value

stocks tended to outperform glamour stocks in markets outside

the U.S. The researchers found that, from 1975 to 1995, value

2

3

An update was published in 2004: Chan, L., & Lakonishok, J. (2004).

1062-9769/$ see front matter 2010 The Board of Trustees of the University of Illinois. Published by Elsevier B.V. All rights reserved.

doi:10.1016/j.qref.2010.06.005

528

equity markets. In their opinion, this laid to rest the possibility

that the value outperformance seen by Lakonishok, Schleifer and

Vishny was simply a sample-specic happenstance within the U.S.

market.4

While there is some agreement that value strategies have produced superior returns, the interpretation of why they have done so

is more controversial. Behavioralists believe that investors consistently tend to overpay for growth stocks that subsequently fail

to live up to expectations (for example, Kahneman & Riepe, 1998

and Gilovich, Grifn, and Kahneman (2002)). In their view value

strategies produce higher returns because they are contrarian to

naive strategies followed by other investors. These naive strategies might range from extrapolating past earnings growth too far

into the future, to assuming a trend in stock prices, to overreacting

to good or bad news, or to simply equating a good investment with

a well-run company irrespective of price. Regardless of the reason,

some investors tend to get overly excited about stocks that have

done very well in the past and buy them up, so that these glamour stocks become overpriced. Similarly, they overreact to stocks

that have done very poorly, oversell them, and these out-of-favor

value stocks become underpriced.

This article is based on prevailing research on existing value

anomalies.5 It evaluates simple value strategies for the European

stock market as well as sophisticated multi-dimensional value

strategies that also include capital return variables (Consistent

Earner Strategy) and momentum factors (Recognized Value Strategy).

In Section 2 of the article our methodology is briey discussed.

Section 3 (a) examines a variety of simple classication schemes for

value and glamour stocks based on dividend yield, price-to-book

and price-to-earnings ratio. Contrary to many studies that test market data on a country-by-country basis, all strategies are applied

and modulated for the European stock market. The EuroStoxx index

has been selected as the market proxy. It can be shown that simple value strategies have produced superior returns motivating our

subsequent use of variable combinations.

Section 3.1 (b) evaluates strategies based on multi-dimensional

selection criteria. First, simple value measures are combined (Multi

Value Strategy). In a second step we combine more sophisticated

multi-dimensional value strategies that also include capital return

variables (Consistent Earner Strategy) and momentum factors

(Recognized Value Strategy). It can be shown that while multidimensional value strategies based on a combination of simple

value variables do not further improve investment performance

and statistical signicance, strategies based on combinations

of value and capital return variables (e.g. Return on Equity)

improve the statistical signicance of results (while generating

compatible investment returns). Strategies based on combinations of value and momentum variables improve both investment performance and signicance compared to simple value

strategies.

Finally in Section 4 the question of whether strategies based

on our investment selection criteria are fundamentally riskier is

evaluated. Evidence is provided that, in general, value strategies

have outperformed glamour strategies quite consistently without

support for the hypothesis that value strategies are fundamentally

riskier than glamour strategies. Conclusions are drawn in Section

5.

4

Simliar results had been shown by Lakonishok, Hamao, and Chan (1991) for

Japan.

5

We widely follow Lakonishok et al. (1994) in the structure of our analysis.

2. Methodology

The sample period covered in this study starts on July 1, 19946

and ends June 30, 2009.7 For portfolio strategies that are tested over

2-year (3-year) performance horizons the last reformation date is

July 1, 2007 (July 1, 2006). As market proxy for the European stock

market the EuroStoxx index has been selected. Results are also veried for the EuroStoxx50 in order to verify that results still hold

if only large capitalization equities are examined. Results for stock

returns of indices containing only large rms are less contaminated

by signicant look-ahead or survivorship bias.8,9

Based on the index we form our model portfolios using as a rst

step one-dimensional (single) accounting ratios, such as dividend

yield (DY), price-to-book10 (P/B) and price-to-earnings11 (P/E). In

addition, corporate return (RoE) and momentum (Levy2712 , Relative Strength 3 months) ratios13 are computed for a Consistent

Earner Strategy (trying to mimic investment styles of successful

and well-known value investors who focus on outstanding companies at a sensible price)14 and a Recognized Value Strategy (trying

to further improve performance by timing reversals better based

on the stock momentum life cycle hypothesis).15 Then ratios and

historical performance data are used to sort individual stocks into

portfolios.16 Based on the investment strategy chosen, deciles are

formed for which performance is measured for 13-year time horizons. Within each of our portfolios, we equally weight all stocks

and compute returns using a buy-and-hold strategy for years t + 1,

t + 2 and t + 3 relative to the time of formation. If a stock is delisted

from the stock exchange during a year, we continue with the same

portfolio using the return of that stock at the time it was last traded

6

Results for starting dates on January 1, April 1 and October 1 were also tested

and results are comparable to conclusions drawn from yearly starting dates on July

1.

7

If the 30th is not a weekday, then the last trading day of the month is used. Years

in tables and graphs refer to a time period from July 1 that year until June 30 of the

subsequent year. Formation and reformation occur based on publicly available price

and accounting data from the previous year (t1). Results for current year estimates

as accessible at formation and reformation dates were comparable. Reformation at

the beginning of the second quarter was chosen in order to ensure that fundamental

company information for the entire previous year published in annual reports, SEC

lings or by the nancial media was available to investors and incorporated into

valuation ratios. 1994 was chosen as the rst formation year because the EuroStoxx

was created in 1999 and index constituents were recalculated back to this time.

8

Look-ahead and survivorship bias are common types of sample selection biases.

The rst is created by the use of information or data in a study or simulation that

would not have been known or available during the period being analyzed. This

will usually lead to inaccurate results in the study or simulation. To avoid this bias

we calculated ratios based on data available at the time of portfolio formation and

reformation, not from revisions published thereafter. The second bias occurs, for

example, when backtesting an investment strategy on a large group of stocks. Then it

may be convenient to look for securities that have data for the entire sample period.

However, eliminating a stock that stopped trading, or shortly left the market, would

input a bias in data samples. To avoid this problem we used historical constituent

lists for the EuroStoxx when we constructed our quantile portfolios.

9

Banz and Breen (1986), Kothari, Shanken, and Sloan (1992). La Porta (1993) also

points out that the selection bias is less serious among larger rms.

10

Rosenberg, Reid and Lanstein (1984) and Lee and Swaminathan (2000) published the rst cited study that evaluated the performance of the book-to- market

strategy.

11

Basu (1977) rst looked at the relationship between common stocks and their

price-to-earnings ratios. He found that a low P/E ratio portfolio earned 6% more per

year than a high P/E portfolio in the 14-year sample.

12

Levy, R. (1967).

13

RoE = Return on Equity, Levy27 = a stocks price divided by its price 27 weeks

earlier, Relative Strength 3 months = performance of a stock compared to the index

during the last 3 months (MO3m).

14

Greenblatt (2006).

15

Oyefeso (2004), Lee, C., & Swaminathan, B. (2000). Price momentum & trading

value. Journal of Finance.

16

As Lakonishok et al. (1994) we consider only positive ratios.

529

Table 1

Yearly average decile returns for portfolio strategies based on one-dimensional classications by various measures of valuea .

Panel A: DY (t0)

Return overview: Yearly

Value premium

Glamour

R1

R2

R3

ANN

CR3

AR

Value

10

101

5.07%

6.81%

7.20%

6.36%

20.30%

6.36%

9.89%

11.19%

5.56%

8.85%

28.97%

8.88%

8.01%

5.69%

7.19%

6.96%

22.36%

6.96%

10.42%

11.52%

9.56%

10.50%

34.91%

10.50%

9.07%

9.71%

8.14%

8.97%

29.41%

8.98%

9.42%

12.56%

9.39%

10.45%

34.74%

10.46%

11.16%

13.02%

10.41%

11.52%

38.71%

11.53%

12.86%

11.49%

7.67%

10.65%

35.48%

10.67%

8.28%

11.59%

15.75%

11.83%

39.85%

11.87%

13.66%

12.46%

15.48%

13.86%

47.61%

13.87%

8.60%

5.64%

8.28%

7.50%

27.31%

7.51%

Return overview: Yearly

Value premium

Glamour

R1

R2

R3

ANN

CR3

AR

Value

10

101

7.23%

7.64%

5.09%

6.65%

21.29%

6.65%

7.32%

8.70%

7.71%

7.91%

25.65%

7.91%

8.04%

7.70%

6.20%

7.31%

23.57%

7.31%

9.88%

10.44%

8.45%

9.59%

31.60%

9.59%

10.39%

9.22%

7.64%

9.08%

29.78%

9.08%

9.45%

9.88%

11.18%

10.17%

33.72%

10.17%

8.60%

11.40%

10.81%

10.26%

34.05%

10.27%

9.22%

12.88%

10.39%

10.82%

36.09%

10.83%

9.01%

9.87%

12.95%

10.60%

35.29%

10.61%

12.64%

18.99%

15.75%

15.76%

55.14%

15.79%

5.40%

11.35%

10.67%

9.12%

33.84%

9.14%

Return overview: Yearly

Value premium

Glamour

R1

R2

R3

ANN

CR3

AR

Value

10

101

1.11%

7.51%

6.60%

5.04%

15.88%

5.07%

5.87%

7.20%

9.26%

7.44%

24.01%

7.45%

9.46%

8.92%

5.78%

8.04%

26.11%

8.05%

11.03%

11.16%

8.72%

10.30%

34.18%

10.30%

10.00%

11.58%

7.69%

9.75%

32.18%

9.76%

9.49%

13.38%

5.94%

9.56%

31.51%

9.60%

12.74%

9.31%

11.22%

11.08%

37.06%

11.09%

9.04%

9.42%

10.12%

9.53%

31.39%

9.53%

11.12%

11.97%

12.95%

12.01%

40.54%

12.02%

13.76%

13.87%

13.39%

13.68%

46.89%

13.68%

12.66%

6.35%

6.79%

8.64%

31.01%

8.60%

Panels AC present the average percentage decile returns for one-dimensional value strategies formed in ascending order based on P/E and P/B; descending order based on

dividend yield (DY). The value portfolio refers to the decile portfolio containing stocks ranking lowest on P/E or P/B, or highest on dividend yield (DY). The glamour portfolio

contains stocks with precisely the opposite set of rankings. Portfolio reformation occurs yearly at the beginning of July during the period from 1994/95 to 2008/09. The

right-most column contains the value premium based on the performance difference between decile 10 and 1.

Panel A: percentage decile returns as described above for a one-dimensional value strategy based on dividend yield (DY).

Panel B: percentage decile returns as described above for a one-dimensional value strategy based on P/E.

Panel C: percentage decile returns as described above for a one-dimensional value strategy based on P/B.

a

R1 = 1st year return, R2 = 2nd year return, R3 = 3rd year return, ANN = annualized 3-year return, CR3 = compounded 3 year return, AR = average 3 year return, (t0) = refer

to annotation 15.

the portfolios during the performance measurement period. Portfolio formation occurs18 at the beginning of July each year and each

stock gets the same weight. Stock, dividend and index information

are derived from Thomson-Reuters Datastream and Factset based

on closing prices. Performance is measured by stock price changes

and dividend payouts. Transaction costs are not included.

In a second step we combine accounting ratios following

the selection procedure used by Lakonishok, Shleifer and Vishny

(1994). For two-dimensional value strategies, stocks are classied

into nine groups by independently sorting them in ascending/descending order into three arrays ((3) bottom 30%, (2) middle

17

The reasons for stocks to be delisted from the stock exchange during a reformation period were mostly acquisitions by other corporations. The last traded

price therefore was taken to approximate real performance of that stock in a given

period. Return on cash proceeds during the remaining period was not included in

the performance calculation.

18

Performance data for year 2 and year 3 (assuming no reformation) is also indicated.

40%, and (1) top 30%) based on each of two variables. The sorts are

12 pairs of variables: DY and P/E, DY and P/B, P/E and P/B, RoE and

DY, RoE and P/E, RoE and P/B, DY and Levy27, DY and MO3m, P/E and

Levy27, P/E and MO3m, P/B and Levy27, P/B and MO3m. Depending

on the two variables being used for classication, the value portfolio either refers to the portfolio containing stocks ranked in the top

group (1) on both variables from among P/E, P/B (sorted in ascending order), or else the portfolio in the top group on one of those

variables or/and in the top group (1) on reversely sorted DY, RoE,

Levy 27, and MO3m. The glamour portfolio19 contains stocks with

precisely the opposite set of rankings. Portfolio formation and reformation occur yearly at the beginning of July during the period

from 1994/95 to 2008/09. For each quartile, performance is measured using the same procedure as for one-dimensional (single)

accounting ratios.

19

In the case of momentum variables, it is usually inappropriate to talk of value

and glamour criteria but for simplicity we refer to the value quantile for the top

parameter characteristics and to glamour for the bottom.

530

Graph 1. Yearly and 3-year annualized decile returns. Graph 1 shows the yearly percentage decile portfolio returns for years 13 and annualized for the entire 3-year period

for a one-dimensional value strategy based on dividend yield (DY). Portfolio reformation occurs yearly at the beginning of July during the period from 1994/95 to 2008/09.

strategies

Table 1, Panels AC present the yearly average decile returns for

one-dimensional value strategies formed in ascending order based

on P/E and P/B;20 descending order based on dividend yield (DY).21

The value portfolio refers to the decile portfolio containing stocks

ranking lowest on P/E and P/B, or highest on dividend yield (DY).

The glamour portfolio contains stocks with precisely the opposite

set of rankings. Portfolio formation and reformation occur yearly at

the beginning of July during the period from 1994/95 to 2008/09.

In addition, year 2 and year 3 returns (assuming no reformation

after year 1), the annualized 3-year return, the compounded 3-year

return and the average 3-year return are indicated. The right-most

column contains the value premium based on the performance

difference between decile 10 and 1.

The yearly average (R1) return differences (value (decile 10)

minus glamour (decile 1)) presented above fall in a range between

5.40% and 12.66% depending on the value variable chosen. The outperformance is statistically signicant based on a 5% signicance

interval except for price-to-book (P/B).22,23 Consequently, the conclusion can be drawn that the value anomaly discovered for most

indexes worldwide also holds for the European market as proxied

by the EuroStoxx index.24

20

Ratios in this article are based on actual data available at formation and reformation. Ratios in graphs and tables are therefore (for better differentiation) assigned

a (t0). Results for ratios based on estimated data were also tested. Outcomes are

comparable.

21

Though RoE (Return in Equity), Levy27 (stock price divided by its price 27 weeks

before) and Relative Strength 3 month (MO3m) constitute no value variable they

are used in combination with value variables for our two-dimensional Consistent

Earner Strategy and Recognized Value Strategy strategies. For their returns as standalone variable, refer to the appendix section.

22

Results of the t-statistic for the test of the hypothesis that the differences in

returns between value and glamour are equal to zero are presented in Table 3, page

14.

23

For simple return and momentum variables, return differences fall in a range

between 2.50% and 11.44%. Results are presented in the appendix section. Though it

was not part of the research question formulated in this study it nevertheless seems

worthwhile to mention that return differences for single capital and momentum

variables are not statistically signicant (page 14).

24

Comparable results are obtained for the EuroStoxx50 index. Lakonishok et al.

(1994) divide the U.S. market into the 50% largest/smallest corporations instead

returns for years 13 and annualized for the entire 3-year period

representatively for a one-dimensional value strategy based on dividend yield (DY).25 In addition to the results obtained earlier it can

be seen that returns rise considerably moving from glamour (1) to

value (10) deciles. It also can be observed that most of the value

difference (steeper curve) is captured in year 1 though differences

are still positive in years 2 and 3.

strategies

Table 2 presents the average yearly percentage quantile returns

for two-dimensional value strategies (including our Consistent

Earner and Recognized Value Strategies) each classied into nine

groups of stocks by independently sorting in ascending/descending

order into three arrays ((1) bottom 30%, (2) middle 40%, and (3) top

30%) each of two variables. The sorts are 12 pairs of variables: DY

and P/E, DY and P/B, P/E and P/B, RoE and DY, RoE and P/E, RoE

and P/B, DY and Levy27, DY and MO3m, P/E and Levy27, P/E and

MO3m, P/B and Levy27, P/B and MO3m. Depending on the two variables being used for classication, the value portfolio either refers

to the portfolio containing stocks ranked in the bottom group (1)

on both variables from among P/E, P/B (sorted in ascending order),

or else the portfolio in the bottom group on one of those variables

or/and in the bottom group (1) on reversely sorted dividend yield

(DY), capital return (RoE), Levy27, and MO3m. The glamour portfolio contains stocks with precisely the opposite set of rankings.

Portfolios reformation occurs yearly at the beginning of July during

the period from 1994/95 to 2008/09. In addition, returns in year 2

and year 3 (assuming no reformation after year 1), the annualized

3-year return, the compounded 3-year return and the average 3year return are indicated. The right-most column contains the value

premium based on the performance difference between groups 1/1

and 3/3.

and likewise conclude (after eliminating the size-effect) that results still hold when

analyzing only large corporations.

25

For decile performance graphs of different one and two-dimensional ratios refer

to the appendix section. Outcomes are comparable.

531

Table 2

Yearly average quantile returns for portfolio strategies based on two-dimensional classications by various value measures.

Return overview: Yearly

Value premium

Glamour

3/3

DY&P/E

DY&P/B

P/E&P/B

DY&RoE

P/E&RoE

P/B&RoE

DY&Levy27

DY&M03m

P/E&Levy27

P/E&M0m3

P/B&Levy27

P/B&M03m

Value

3/2

Multi value

6.50%

9.79%

8.91%

5.89%

6.77%

5.21%

Consistent

4.96%

8.68%

2.95%

12.18%

3.29%

5.44%

Recognized value

2.42%

6.69%

2.51%

8.03%

0.50%

8.25%

0.84%

8.25%

1.81%

5.29%

1.50%

7.32%

2/3

3/1

2/2

1/3

2/1

1/2

1/1

Total

1/13/3

8.33%

10.74%

10.09%

13.20%

8.00%

5.64%

10.81%

9.84%

10.60%

3.22%

10.64%

12.39%

10.37%

10.62%

12.21%

12.97%

14.08%

11.18%

12.38%

11.85%

10.98%

9.88%

9.89%

9.52%

5.89%

2.94%

4.20%

9.64%

7.75%

6.57%

10.62%

12.22%

9.28%

9.96%

10.85%

10.37%

11.10%

10.60%

9.73%

11.21%

10.72%

10.83%

12.12%

9.25%

11.59%

11.39%

11.46%

11.50%

9.89%

9.50%

9.19%

6.43%

8.51%

14.78%

5.85%

7.50%

5.92%

4.32%

6.40%

6.75%

13.12%

12.24%

7.16%

8.27%

8.96%

9.26%

8.91%

9.48%

8.96%

10.45%

8.86%

7.79%

8.19%

9.57%

10.39%

11.78%

13.43%

14.72%

14.79%

12.83%

11.39%

10.66%

10.88%

11.23%

11.72%

10.67%

15.59%

14.57%

13.99%

13.63%

18.86%

18.54%

16.54%

14.97%

12.88%

13.71%

9.79%

9.78%

9.33%

9.35%

9.22%

9.20%

16.44%

16.03%

17.05%

14.14%

11.08%

12.21%

Presents the yearly average percentage quantile returns for two-dimensional value strategies classied into nine groups of stocks by independently sorting in ascending/descending order into three arrays ((1) bottom 30%, (2) middle 40%, and (1) top 30%) based on each of two variables. The sorts are 12 pairs of variables: DY and P/E, DY

and P/B, P/E and P/B, RoE and DY, RoE and P/E, RoE and P/B, DY and Levy27, DY and MO3m, P/E and Levy27, P/E and MO3m, P/B and Levy27, P/B and MO3m. Depending on the

two variables being used for classication, the value portfolio either refers to the portfolio containing stocks ranked in the bottom group (1) on both variables from among

P/E, P/B (sorted in ascending order), or else the portfolio in the bottom group on one of those variables or/and in the bottom group (1) on reversely sorted dividend yield

(DY), capital return (RoE), Levy27, and MO3m. The glamour portfolio contains stocks with precisely the opposite set of rankings. Portfolios reformation occurs yearly at the

beginning of July during the period from 1994/95 to 2008/09. The right-most column contains the value premium based on the performance difference between group 1/1

and 3/3.

For two-dimensional value strategies based on two value variables (Multi Value Strategy) the yearly average return differences

(quantile 1/1 minus quantile 3/3) presented above fall in a range

between 2.94% and 5.89% depending on the variable combination

chosen. These strategies do not improve investment performance

compared to simple value strategies. Furthermore statistical significance is reduced26 (in fact, investment results get worse and are

statistically insignicant).27

Strategies based on combinations of value and capital return

variables28 (Consistent Earner Strategy) seem to result in investment returns comparable to single variable value strategies ranging

from 6.43% to 14.78%. Statistical signicance however improves.29

The Consistent Earner Strategy mimics investment styles of wellknow investors like Warren Buffett or Joel Greenblatt who further

developed the value investing concept by focusing on nding an

outstanding company at a sensible price or buying cheap and

good companies with competitive advantages indicated by a high

return on capital rather than generic companies at a bargain price

as originally promoted by Graham and Dodd.

Strategies based on combinations of value and momentum

variables (Recognized Value Strategy) do improve both investment performance and signicance compared to single variable

value strategies. Investment returns are in a range from 11.08%

to 17.05% annually. The Recognized Value Strategy is based on the

stock momentum life cycle hypothesis30 stating that stocks move

alternately through periods of relative glamour and neglect

attempting to reconcile intermediate horizon momentum and long

horizon-reversals of behavioral nance theories.

26

An explanation may be that selection based on mixed value criteria does reduce

the variables indication for value because of accounting features. For instance low

P/Es are a value indicator for pharmaceutical companies, low P/Bs are not, since

these companies have high amounts of intangible assets increasing this ratio articially.

28

e.g. Return on Equity.

29

Refer to Table 3, page 14 for a statistical result summary.

30

Lee & Swaminathan (2000). Price momentum & trading value. Journal of Finance.

27

4. Risk evaluation

Two competing theories have been proposed to explain why

various investment strategies have produced higher returns in

the past. The capital asset pricing model (CAPM) relating risk and

expected return is grounded on the theory that rational investors

demand higher returns for higher risks. Serving as a common model

for the pricing of risky securities in the nancial industry, it takes

into account an assets sensitivity to non-diversiable risk (also

known as systematic risk or market risk), often referred to by the

measure beta (), as well as the expected return of the market

and the expected return of a theoretical risk-free asset. In contrast,

behavioral nance theories recognize a psychological element in

nancial decision-making, thus challenging traditional models that

assume investors will always weigh risk/return factors rationally

and act without bias.31 For example, the human tendency to avoid

admitting error, called fear of regret by psychologists, can cause

an investor to hold a losing stock too long or sell a winner too soon.

Similarly, investment choices are inuenced positively or negatively by attitudes toward wealth, by investor attention, mimicry

(herding instinct), etc. The premise of behavioral nance is that

taking psychological factors into account can enhance the effectiveness of investment strategies and explain the success of contrarian

and value strategies (described as anomalies or inefciencies in

standard nancial literature).

In this section it will be examined whether superior returns by

value portfolios constructed based on one- and two-dimensional

variables (Multiple Value, Consistent Earner, Recognized Value

strategies) formed using the EuroStoxx benchmark as the sample index (EuroStoxx Value Anomaly) can be explained by a higher

exposure to systematic risk. In the subsequent analysis we widely

follow the methodology used by Lakonishok et al. (1994).

Value stocks would be fundamentally riskier than glamour

stocks if they underperform glamour stocks in periods of severe

market declines in which the marginal utility of wealth is high,

31

532

Graph 2. Yearly return differences (value minus glamour): EuroStoxx. Graph 2 shows the yearly percentage portfolio return differences (value quantile (1/1) minus glamour

quantile (3/3)) based on the EuroStoxx index for a two-dimensional value classication scheme based on DY (t0) and P/E (t0). In addition, years in which the European market

index (EuroStoxx) declined are marked by N, years in which it rose are indicated by a +. Yearly data in the 1994/952008/09 period refers to the 12 months between the

beginning of July and the end of June the following year. Portfolio reformation occurs yearly.

we look at the consistency of performance of each selected strategy

over time and then we ask how each performs in different market

environments. In addition, we assess some traditional measures of

risk, such as beta and the standard deviation of returns, to compare

value and glamour strategies.32

Graph 2 shows the year-by-year performance differences (value

minus glamour) of a two-dimensional value strategy based on DY

and P/E for the EuroStoxx index over the period from 1995/95 to

2008/09 (July 1, 1994 and June 30, 2009).33 The strategy has quite

consistently generated a positive value difference. Using a 1-year

horizon, value outperformed glamour in 11 out of 15 years using a

strategy based on DY& P/E.

While the number of years (N = 15) is too small to draw signicant conclusions a more detailed examination of quarterly results

(N = 60) still reveals a comparable while slightly less spectacular

picture.

Table 3 presents the quarter-by-quarter performance differences (value minus glamour) of one- and two-dimensional value

strategies for the EuroStoxx index over the period from July 1, 1994

to June 30, 2009. The quarterly average return differences for each

strategy are reported at the bottom of each column along with tstatistic for the test of the hypothesis that the difference in returns

between value and glamour is equal to zero. The corresponding pvalue, the standard deviation (quarterly and annualized) and the

Sharp Ratio34 are also presented at the bottom lines.

Over a 1-year time horizon, one-dimensional value strategies

based on DY, P/B, P/E generated negative performance differences

(value minus glamour) in only 21, 26, and 18 instances respec-

32

Common portfolio measures are also indicated, however only to provide further

useful information.

33

Refer to the appendix section for a complete graphical overview of value difference evolutions based on all variable combinations.

34

The Sharp Ratio (SR) is a risk-adjusted measure developed by William F. Sharpe,

calculated using standard deviation and excess return to determine reward per unit

of risk. The higher the Sharpe ratio, the better a portfolios historical risk-adjusted

performance.

tively (35.0%, 43.3%, 30.0%). Results for single capital return and

momentum variables are comparable.35

Multi Value Strategy: Two-dimensional value strategies based

on simple value variable combinations (e.g. DY & P/E, DY & P/B, P/E

& P/B) generated negative performance differences over a 1-year

time horizon in 22, 22, and 23 instances respectively (36.7%, 36.7%,

38.3%). Performance differences for these value variable combinations however are not statistically signicant.

Consistent Earner Strategy: Two-dimensional value strategies

based on simple value and capital return variable combinations

(e.g. RoE & DY, RoE & P/E, RoE & P/B) generated negative performance differences over a 1-year time horizon in 23, 20, and 20

instances respectively (38.3%, 33.3%, 33.3%). Statistical signicance

increases compared to single value variables.

Recognized Value Strategy: Two-dimensional value strategies

based on simple value and momentum variable combinations (e.g.

DY & Levy27, DY & MO3m, P/E & Levy27, P/E & MO3m, P/B & Levy27,

P/B & MO3m) generated negative performance differences over a

1-year time horizon in 21, 19, 19, 25, 18, and 18 instances respectively (35.0%, 31.7%, 31.7%, 41.7%, 30.0%, 30.0%). Return differences

and statistical signicance both increase compared to single value

variables.

In most cases presented above, the magnitude of underperformance of value versus glamour was mostly small relative to the

mean outperformance, and return differences were negative during market declines in even fewer instances. Thus we can conclude

that downside risk is relatively low.

We proceed and examine the performance of one- and twodimensional strategies in extreme down markets on a monthly

basis thereby comparing the performance difference (value minus

glamour) in the worst months for the stock market as a whole.

Table 4, Panels AD, lists the performance of one- and twodimensional strategies based on DY and on combinations of DY

35

Note that value differences for single value variables are statistically signicant

at the 5.0% condence interval (exception: P/B). Results for single variables based

on capital return and momentum ratios are generally not statistically signicant.

533

Table 3

Quarterly average portfolio return differences (value minus glamour) based on various value portfolio strategies for one- and two-dimensional classication schemes

(EuroStoxx).

Q3 94

Q4 94

Q1 95

Q2 95

Q3 95

Q4 95

Q1 96

Q2 96

Q3 96

Q4 96

Q1 97

Q2 97

Q3 97

Q4 97

Q1 98

Q2 98

Q3 98

Q4 98

Q1 99

Q2 99

Q3 99

Q4 99

Q1 00

Q2 00

Q3 00

Q4 00

Q1 01

Q2 01

Q3 01

Q4 01

Q1 02

Q2 02

Q3 02

Q4 02

Q1 03

Q2 03

Q3 03

Q4 03

Q1 04

Q2 04

Q3 04

Q4 04

Q1 05

Q2 05

Q3 05

Q4 05

Q1 06

Q2 06

Q3 06

Q4 06

Q1 07

Q2 07

Q3 07

Q4 07

Q1 08

Q2 08

Q3 08

Q4 08

Q1 09

Q2 09

DY (tO)

PB (tO)

PE (tO)

RoE (tO)

Levy27

M03m

DY&PE

DY&PB

PE&PB

+

+

N

+

+

+

+

+

+

+

+

+

+

N

+

+

N

+

+

+

N

+

+

N

N

N

N

+

N

+

N

N

N

+

N

+

N

+

+

+

N

+

+

+

+

+

+

N

+

+

+

+

N

+

N

N

N

N

N

+

4.22%

3.11%

8.86%

10.63%

6.15%

11.56%

1.65%

3.05%

0.32%

0.25%

2.88%

1.70%

2.53%

0.16%

10.92%

14.15%

1.69%

8.11%

14.73%

8.14%

7.09%

18.40%

6.69%

7.47%

7.88%

27.42%

17.79%

7.12%

8.88%

1.28%

4.19%

11.89%

8.13%

2.11%

10.57%

5.13%

5.66%

2.52%

5.68%

4.46%

5.29%

7.02%

0.48%

2.74%

1.08%

1.50%

1.32%

3.21%

3.44%

0.56%

0.14%

0.43%

0.77%

0.18%

1.04%

2.15%

5.35%

1.51%

7.37%

6.64%

7.40%

0.09%

12.32%

2.42%

10.58%

5.01%

16.11%

0.58%

3.58%

6.65%

35.86%

3.30%

16.38%

0.56%

13.30%

8.86%

11.30%

4.27%

5.33%

1.85%

0.78%

32.52%

9.90%

10.72%

4.79%

36.22%

26.65%

3.30%

8.01%

9.22%

3.60%

13.80%

0.67%

7.56%

2.92%

0.45%

12.90%

1.14%

3.40%

3.94%

0.38%

3.90%

7.78%

0.63%

6.74%

1.49%

10.41%

1.51%

6.36%

2.57%

3.32%

0.66%

5.95%

6.67%

2.75%

4.71%

1.44%

10.37%

15.04%

9.53%

5.40%

4.70%

3.63%

9.94%

4.00%

9.23%

3.25%

4.94%

0.05%

2.72%

8.70%

10.96%

1.72%

1.53%

6.03%

4.04%

8.97%

7.42%

12.45%

6.72%

10.13%

17.44%

11.61%

5.12%

6.92%

25.93%

25.98%

8.23%

7.58%

7.72%

14.64%

16.84%

2.57%

3.79%

4.06%

3.36%

10.86%

4.43%

3.98%

2.27%

6.94%

1.98%

0.10%

7.11%

3.90%

4.71%

4.65%

4.40%

4.22%

2.46%

2.30%

9.94%

3.40%

7.57%

4.37%

3.41%

0.86%

4.79%

6.27%

10.08%

6.25%

5.61%

0.67%

5.98%

8.90%

9.43%

12.70%

5.64%

8.38%

0.96%

29.91%

11.35%

8.90%

3.68%

5.56%

4.29%

0.98%

4.71%

0.04%

0.31%

3.00%

13.48%

2.91%

2.67%

4.58%

3.85%

5.68%

3.83%

9.14%

2.26%

9.72%

8.28%

5.11%

10.72%

7.85%

7.21%

4.89%

1.17%

1.18%

5.25%

12.77%

1.68%

1.24%

6.56%

4.70%

5.33%

7.29%

6.45%

1.57%

1.07%

3.00%

2.28%

3.74%

8.53%

2.53%

2.47%

4.73%

15.61%

9.71%

8.18%

1.50%

2.88%

1.07%

0.08%

5.19%

3.45%

12.16%

6.58%

0.35%

8.62%

6.26%

2.77%

10.95%

4.15%

12.35%

2.74%

5.92%

16.19%

3.22%

0.53%

41.98%

1.31%

11.49%

11.11%

3.75%

6.57%

15.84%

2.19%

18.30%

33.65%

5.55%

21.09%

28.21%

16.23%

0.21%

18.58%

0.94%

8.49%

6.17%

0.30%

10.47%

0.62%

1.47%

4.89%

3.28%

3.50%

7.95%

0.91%

2.71%

4.49%

0.92%

2.67%

5.11%

7.86%

0.39%

13.28%

12.80%

0.11%

14.24%

5.51%

1.53%

2.39%

1.15%

1.15%

5.23%

6.88%

2.53%

2.02%

2.20%

1.45%

5.93%

6.43%

3.20%

2.78%

8.57%

4.12%

5.77%

2.28%

6.08%

8.46%

45.66%

1.89%

16.24%

13.66%

7.95%

30.22%

7.21%

9.59%

15.42%

20.98%

4.77%

14.46%

34.00%

20.66%

2.23%

22.71%

1.29%

4.10%

1.98%

3.08%

10.02%

2.66%

3.00%

2.11%

8.04%

2.44%

3.30%

4.23%

0.29%

0.01%

4.88%

4.88%

5.78%

9.18%

5.22%

16.21%

12.29%

7.00%

7.47%

9.73%

1.75%

0.02%

8.38%

8.77%

2.52%

7.53%

3.03%

0.50%

0.22%

0.58%

1.90%

2.08%

4.04%

2.21%

3.35%

4.53%

8.39%

12.20%

11.52%

3.11%

5.15%

15.85%

4.92%

5.25%

5.51%

19.06%

15.63%

4.14%

6.47%

2.40%

6.18%

11.29%

4.17%

1.44%

0.87%

3.44%

3.84%

0.72%

4.60%

2.52%

6.09%

3.61%

1.11%

4.09%

0.88%

4.53%

1.49%

2.76%

1.45%

0.32%

0.34%

1.75%

1.47%

1.84%

1.13%

3.68%

2.37%

5.91%

9.16%

10.98%

7.33%

1.82%

5.85%

2.26%

5.60%

8.33%

12.44%

4.85%

1.76%

1.30%

2.62%

1.08%

10.44%

5.21%

8.38%

10.53%

8.30%

12.03%

9.34%

1.85%

0.61%

20.65%

3.01%

8.20%

1.39%

20.60%

15.13%

2.70%

5.20%

2.96%

4.15%

9.84%

7.37%

0.28%

2.77%

0.17%

3.17%

1.17%

3.46%

1.09%

2.70%

4.73%

2.17%

0.98%

0.04%

3.31%

5.29%

0.60%

2.68%

2.44%

1.89%

0.44%

4.51%

5.54%

1.95%

9.06%

4.21%

7.19%

13.18%

9.38%

5.94%

2.49%

6.07%

0.75%

0.11%

3.78%

0.21%

1.94%

4.39%

4.01%

6.69%

1.16%

11.45%

5.03%

5.75%

6.93%

13.76%

10.73%

8.59%

1.82%

2.75%

30.90%

12.15%

10.71%

3.03%

25.50%

18.92%

4.23%

4.30%

0.21%

6.34%

12.55%

2.68%

5.66%

1.32%

5.66%

4.88%

0.31%

3.14%

3.70%

4.05%

4.30%

2.87%

2.87%

1.27%

7.84%

5.09%

0.82%

1.13%

0.70%

1.11%

3.14%

7.87%

8.20%

0.04%

5.58%

0.52%

8.23%

10.56%

12.55%

Mean

t-statistic

p-value

st. dev.

Number

st. dev. (ann.)

SR

2.20%

2.2875

0.0258

7.43%

60

14.87%

0.59

1.30%

0.9034

0.3700

11.15%

60

22.30%

0.23

3.21%,

3.1401

0.0026

7.92%

60

15.85%

0.81

1.63%

1.6815

0.0979

7.50%

60

15.00%

0.43

2.64%

1.8406

0.0707

11.09%

60

22.19%

0.48

2.46%

1.6572

0.1028

11.50%

60

23.00%

0.43

1.45%

1.8494

0.0694

6.05%

60

12.11%

0.48

0.56%

0.6185

0.5386

7.07%

60

14.15%

0.16

0.95%

0.8990

0.3723

8.22%

60

16.45%

0.23

534

Table 3 (Continued)

Value

premiums

1/13/3

Q3 94

Q4 94

Q1 95

Q2 95

Q3 95

Q4 95

Q1 96

Q2 96

Q3 96

Q4 96

Q1 97

Q2 97

Q3 97

Q4 97

Q1 98

Q2 98

Q3 98

Q4 98

Q1 99

Q2 99

Q3 99

Q4 99

Q1 00

Q2 00

Q3 00

Q4 00

Q1 01

Q2 01

Q3 01

Q4 01

Q1 02

Q2 02

Q3 02

Q4 02

Q1 03

Q2 03

Q3 03

Q4 03

Q1 04

Q2 04

Q3 04

Q4 04

Q1 05

Q2 05

Q3 05

Q4 05

Q1 06

Q2 06

Q3 06

Q4 06

Q1 07

Q2 07

Q3 07

Q4 07

Q1 08

Q2 08

Q3 08

Q4 08

Q1 09

Q2 09

+

+

N

+

+

+

+

+

+

+

+

+

+

N

+

+

N

+

+

+

N

+

+

N

N

N

N

+

N

+

N

N

N

+

N

+

N

+

+

+

N

+

+

+

+

+

+

N

+

+

+

+

N

+

N

N

N

N

N

+

Mean

t-statistic

p-value

st. dev.

Number

st. dev. (ann.)

SR

DY (tO)

4.77%

4.64%

4.38%

5.49%

2.84%

13.72%

0.02%

6.98%

5.73%

8.00%

6.45%

7.97%

4.90%

0.31%

5.97%

0.58%

6.80%

0.93%

3.62%

0.51%

4.03%

16.14%

9.74%

5.50%

8.90%

12.91%

6.27%

7.35%

6.21%

2.93%

6.32%

9.53%

6.66%

1.45%

0.65%

0.98%

4.86%

3.46%

6.52%

0.65%

5.56%

3.32%

2.82%

4.60%

2.99%

1.35%

4.39%

4.36%

4.73%

1.25%

2.18%

1.89%

0.09%

0.55%

0.67%

1.47%

3.07%

8.47%

4.46%

0.22%

1.61%

2.2553

0.0278

5.53%

60

11.07%

0.58

PB(tO)

12.97%

11.27%

2.93%

0.56%

9.09%

16.95%

11.06%

5.40%

8.52%

7.37%

1.23%

6.63%

8.55%

7.40%

3.66%

8.48%

24.04%

16.49%

3.37%

7.06%

13.30%

31.88%

3.10%

11.11%

19.21%

47.52%

18.49%

22.31%

17.50%

6.83%

10.69%

32.12%

8.93%

7.21%

8.06%

3.16%

2.89%

22.91%

6.34%

3.40%

21.48%

14.47%

19.78%

13.84%

1.44%

19.27%

14.44%

12.98%

14.61%

6.43%

24.32%

14.13%

2.21%

5.82%

11.04%

1.25%

16.21%

4.80%

10.97%

7.39%

3.76%

2.0388

0.0460

14.28%

60

28.56%

0.53

PE (tO)

3.22%

2.78%

0.82%

2.81%

8.76%

8.03%

4.02%

2.82%

3.46%

1.80%

1.48%

8.32%

3.98%

0.62%

3.51%

2.76%

11.70%

1.52%

6.09%

2.84%

4.44%

5.22%

1.00%

3.18%

8.02%

12.13%

9.16%

5.27%

5.71%

5.29%

9.76%

13.81%

6.18%

6.51%

2.02%

1.09%

2.36%

3.63%

0.14%

2.55%

6.67%

1.63%

0.91%

5.81%

1.03%

0.94%

0.18%

3.39%

0.88%

0.69%

0.40%

8.24%

3.15%

2.83%

0.95%

7.72%

4.37%

4.22%

1.96%

12.03%

2.22%

3.4445

0.0011

4.99%

60

9.99%

0.89

DY (tO) &

Levy27

11.85%

0.48%

10.59%

12.70%

2.33%

21.29%

7.43%

5.62%

2.91%

11.17%

2.87%

4.75%

4.47%

0.38%

26.67%

9.28%

0.66%

14.37%

18.95%

0.79%

1.64%

3.96%

1.30%

9.76%

6.54%

24.74%

14.88%

9.53%

16.31%

18.90%

9.53%

25.04%

26.31%

9.27%

9.98%

12.87%

2.17%

0.27%

2.32%

3.64%

10.01%

6.85%

2.88%

6.96%

2.79%

5.46%

5.24%

4.31%

0.68%

7.26%

7.63%

6.04%

1.34%

2.94%

7.17%

5.49%

12.87%

4.37%

10.00%

9.97%

3.60%

2.7318

0.0083

10.20%

60

20.39%

0.71

DY (tO) &

M03m

0.69%

7.50%

2.73%

10.10%

1.65%

14.61%

2.66%

4.84%

7.28%

13.35%

7.85%

13.05%

6.66%

0.20%

16.22%

13.24%

7.69%

3.92%

14.72%

1.15%

0.57%

5.77%

11.57%

9.79%

2.68%

27.31%

20.30%

8.96%

14.99%

22.13%

5.67%

18.76%

29.98%

13.45%

9.51%

13.07%

0.19%

9.85%

1.26%

1.75%

6.66%

5.28%

4.35%

2.26%

0.27%

4.76%

5.41%

2.65%

0.54%

0.47%

1.75%

2.09%

0.31%

1.87%

0.76%

8.22%

1.99%

13.97%

8.89%

21.10%

3.45%

2.6653

0.0099

10.04%

60

20.07%

0.69

PB (tO) &

Levy27

11.99%

1.64%

18.27%

10.56%

1.98%

16.99%

-10.71%

10.20%

9.71%

5.78%

0.89%

26.72%

18.03%

2.98%

29.21%

5.83%

15.47%

21.38%

1.16%

0.20%

5.60%

0.66%

9.99%

0.33%

11.17%

35.09%

10.56%

2.40%

13.16%

18.33%

4.74%

20.03%

18.30%

10.42%

7.04%

8.67%

7.15%

1.11%

0.78%

0.61%

13.13%

6.07%

3.06%

5.55%

4.89%

1.97%

9.91%

6.46%

3.63%

8.77%

4.86%

5.61%

2.45%

5.82%

2.01%

7.93%

7.27%

12.61%

3.91%

1.01%

2.54%

1.7398

0.0871

11.30%

60

22.60%

0.45

PB (tO) &

M03m

4.82%

3.51%

7.96%

0.26%

3.26%

4.53%

9.53%

4.58%

3.00%

7.72%

52.23%

7.75%

16.98%

6.86%

26.69%

5.80%

12.76%

4.73%

0.80%

1.24%

7.77%

4.61%

11.53%

4.72%

2.56%

35.95%

18.68%

0.26%

9.82%

13.59%

3.60%

17.53%

26.14%

14.57%

4.67%

12.45%

9.70%

4.96%

2.40%

2.58%

8.20%

3.90%

6.13%

4.46%

4.02%

3.20%

5.16%

0.92%

3.59%

5.08%

4.50%

0.61%

1.83%

3.01%

2.51%

7.82%

12.16%

15.35%

2.74%

2.40%

2.65%

1.7271

0.0894

11.91%

60

23.81%

0.45

PE (tO) &

Levy27

4.44%

0.39%

6.84%

1.67%

5.66%

16.35%

3.47%

7.76%

1.62%

7.08%

4.65%

3.70%

11.60%

8.67%

25.44%

1.93%

13.22%

17.45%

5.37%

9.09%

0.96%

1.88%

2.91%

3.28%

11.86%

12.51%

16.07%

8.23%

13.83%

13.28%

10.03%

22.49%

17.09%

13.54%

5.76%

7.31%

8.72%

1.34%

8.01%

8.29%

9.87%

4.72%

5.88%

11.07%

6.20%

7.48%

12.34%

2.14%

0.50%

10.27%

8.25%

6.33%

4.78%

7.10%

2.98%

2.68%

20.98%

3.08%

8.09%

5.46%

3.88%

3.3196

0.0015

9.06%

60

18.13%

0.86

PE (t0)

& M03m

7.83%

7.93%

9.71%

0.26%

9.02%

0.64%

9.60%

2.86%

6.10%

7.39%

2.50%

13.83%

6.40%

4.18%

20.01%

4.09%

9.19%

9.10%

8.96%

1.55%

5.22%

7.20%

7.79%

5.40%

1.40%

28.28%

18.72%

6.50%

9.39%

7.57%

9.04%

18.99%

20.57%

14.92%

5.18%

10.79%

13.43%

0.31%

2.06%

1.84%

7.56%

1.91%

1.41%

6.53%

0.45%

4.80%

5.01%

0.89%

3.05%

5.94%

2.26%

2.03%

0.43%

8.27%

0.82%

12.75%

14.62%

9.23%

7.84%

3.90%

3.24%

2.8646

0.0058

8.76%

60

17.52%

0.74

Quarterly percentage portfolio return differences (value minus glamour) based on portfolios formed from EuroStoxx constituents using different one- and two-dimensional

value classication schemes. Portfolios reformation occurs yearly at the beginning of July during the period from 1994/95 to 2008/09. In addition, years in which the market

indexes declined are marked by N, years in which it rose are indicated by a +. The t-statistic for the test of the hypothesis that the differences in returns between value

and glamour are equal to zero, the corresponding p-value and the quarterly standard deviation of returns are indicated in the bottom lines. The return differences standard

deviation (annualized) and the Sharp Ratio (SR) are indicated for convenience as further useful information.

535

Table 4

Average monthly returns in different market environments: worst 25 down months, next 50 down months, positive 80 up months, best 25 up months.

Panel A: Dividend yield

W25

N53

P80

B25

10

Eq.-w.

101

t-statistic

p-Value

0.0954

0.0247

0.0209

0.0874

0.0891

0.0202

0.0278

0.0803

0.0939

0.0198

0.0251

0.0840

0.0851

0.0150

0.0254

0.0790

0.0852

0.0200

0.0247

0.0813

0.0848

0.0188

0.0256

0.0788

0.0793

0.0119

0.0261

0.0682

0.0842

0.0108

0.0271

0.0766

0.0844

0.0159

0.0240

0.0716

0.0720

0.0127

0.0279

0.0721

0.0852

0.0168

0.0255

0.0778

0.0234

0.0120

0.0070

0.0153

3.0424

2.0129

2.3613

1.5309

0.0056

0.0506

0.0205

0.1389

W25

N50

P80

B25

3/3

3/2

2/3

3/1

2/2

1/3

2/1

1/2

1/1

Eq.-w.

Index

1/13/3

t-statistic

p-Value

0.0946

0.0268

0.0194

0.0972

0.0900

0.0209

0.0269

0.0791

0.0937

0.0202

0.0253

0.0909

0.0921

0.0203

0.0287

0.0831

0.0822

0.0141

0.0262

0.0695

0.0784

0.0164

0.0237

0.0815

0.0773

0.0164

0.0255

0.0779

0.0811

0.0132

0.0288

0.0691

0.0784

0.0105

0.0261

0.0687

0.0855

0.0173

0.0257

0.0786

0.0000

0.0000

0.0000

0.0000

0.0162

0.0163

0.0067

0.0285

2.6067

3.3483

2.4413

3.6663

0.0155

0.0017

0.0167

0.0012

W25

N50

P80

B25

3/3

3/2

2/3

3/1

2/2

1/3

2/1

1/2

1/1

Eq.-w.

1/13/3

t-statistic

p-value

0.1071

0.0309

0.0209

0.1026

0.0872

0.0184

0.0224

0.0782

0.1021

0.0182

0.0225

0.0887

0.0837

0.0155

0.0293

0.0775

0.0804

0.0177

0.0254

0.0729

0.0959

0.0180

0.0265

0.0817

0.0743

0.0109

0.0285

0.0723

0.0727

0.0117

0.0256

0.0677

0.0692

0.0038

0.0290

0.0769

0.0853

0.0164

0.0257

0.0781

0.0379

0.0270

0.0080

0.0257

2.5519

3.3124

2.1662

1.7922

0.0175

0.0019

0.0331

0.0857

W25

N50

P80

B25

3/3

3/2

2/3

3/1

2/2

1/3

2/1

1/2

1/1

Eq.-w.

1/13/3

t-statistic

p-Value

0.1112

0.0300

0.0221

0.1042

0.0895

0.0193

0.0261

0.0785

0.1005

0.0182

0.0257

0.0874

0.0773

0.0157

0.0268

0.0778

0.0833

0.0142

0.0256

0.0730

0.0972

0.0155

0.0276

0.0843

0.0734

0.0151

0.0274

0.0746

0.0758

0.0113

0.0257

0.0657

0.0581

0.0072

0.0289

0.0719

0.0853

0.0161

0.0261

0.0779

0.0531

0.0229

0.0068

0.0323

4.0470

3.5922

1.7503

1.9776

0.0005

0.0008

0.0837

0.0596

Panels AD present the average percentage decile portfolio returns, the average total performance, the return differences (value minus glamour) on a monthly basis

representatively for one-dimensional value strategies based on DY; for two-dimensional strategies based on DY and RoE, DY and Levy27, DY and MO3m. The performance

of our portfolios are divided into four states of general market environments; the 25 worst stock return months in the sample based on the equally weighted index, the

remaining 50 negative months other than the 25 worst, the 80 positive up months other than the 25 best, and the 25 best up months in the sample. The average difference

in returns between value and glamour for each state is also reported along with t-statistics for the test that the differences of returns are equal to zero and its corresponding

p-value.

and RoE, Levy27 and MO3m during four states of the global market; the 25 worst stock return months36 in the sample based on the

equally weighted index, the remaining 50 negative months other

than the 25 worst, the 80 positive months other than the 25 best,

and the 25 best months in the sample. The average difference in

returns between the value and glamour portfolio for each state is

also reported along with t-statistics for the test that the difference

of returns is equal to zero and its corresponding p-value.37

The results in this table are ambiguous (due to low t-statistics).

While for most classication schemes, the value portfolio outperformed glamour in the markets worst 25 months and in the next

50 negative months, results in all cases are only statistically significant for the category Next negative 50 months.38 For example,

using DY, the value portfolio lost an average of 7.2% of its value

in the worst 25 months, whereas glamour lost 9.5% of its value.

Similarly, the value portfolio outperformed glamour in the next

worst 50 months in which the index declined. It lost 1.5% in these

months while glamour experienced a 2.5% decline. Similar results

can be observed for other one- and two-dimensional value strategies as well (refer to the appendix section). The value strategy did

generally better when the market fell. In the 80 positive months

other than the best 25, one- and two-dimensional value strategies

signicance in some cases. In the very best 25 months, one- and

two-dimensional value strategies underperformed glamour39 substantially. Return results however also lack statistical signicance.

If anything, the superior performance of the value strategy is

skewed toward negative market return months rather than positive market return months. Overall, the value strategy performed

better than the glamour in all states other then extreme upward

movements. Table 4 thus indicates that the value strategy does not

expose investors to greater downside risk.

Finally, for completeness, Table 5, Panels AD present some

more traditional risk measures for portfolios using our classication schemes. These risk measures are calculated using quarterly

return measurement intervals over the sample period. For each

of our strategies, we have 60 quarterly return observations in the

year following the rst formation and hence we can compute the

standard deviation of quantile returns. We also have calculated

corresponding returns on the total return of the EuroStoxx index

(equally weighted) and can calculate a beta for each quantile portfolio.

First, the beta of the equally weighted index is lower then for

the market-capitalized index. Secondly betas for value portfolios

are similar or much smaller than glamour portfolios.40 Only for

some single value strategies are betas of the value portfolios slightly

36

Slight differences in returns and risk measures are due to the fact that negative

parameter characteristics are not in included in this analysis. Refer also to Section

2.

38

Illustrations are presented for dividend yield (DY). For a complete list including

all variable examined refer to the appendix section. Similar results can be observed.

37

39

These results are consisted with earlier observations. For a complete list of all

variables examined refer to the appendix section.

40

Refer also to the appendix section for variable combinations other than with

dividend yield.

536

Table 5

Traditional risk measures: beta, standard deviation.

Panel A: Dividend yield

Beta ann.

St. dev. (ann)

10

Eq.-w.

1.0836

0.2098

1.0481

0.1994

1.0962

0.2050

0.9987

0.1860

1.0077

0.1870

1.0012

0.1862

0.8911

0.1671

0.9784

0.1835

0.9907

0.1852

0.9265

0.1801

0.9079

0.1796

Beta ann.

St. dev. (ann)

3/3

3/2

2/3

3/1

2/2

1/3

2/1

1/2

1/1

Eq.-w.

1.1358

0.2187

1.0360

0.1947

1.1008

0.2059

1.0642

0.2068

0.9211

0.1723

0.9837

0.1926

0.9364

0.1819

0.9544

0.1793

0.9199

0.1776

0.9122

0.1742

3/3

3/2

2/3

3/1

2/2

1/3

2/1

1/2

1/1

Eq.-w.

1.2331

0.2477

1.0090

0.1899

1.1042

0.2119

0.9885

0.1927

0.9497

0.1773

1.1074

0.2105

0.9047

0.1735

0.8805

0.1668

0.9046

0.2030

0.9093

0.1914

3/3

3/2

2/3

3/1

2/2

1/3

2/1

1/2

1/1

Eq.-w.

1.2773

0.2550

1.0326

0.1930

1.1206

0.2141

0.9496

0.1872

0.9590

0.1774

1.1341

0.2181

0.8966

0.1745

0.8920

0.1691

0.7953

0.1743

0.9088

0.1920

Beta ann.

St. dev. (ann)

Beta ann.

St. dev. (ann)

Panel A shows the beta with respect to the European market index EuroStoxx, the decile return standard deviations and the return value premiums standard deviations

(annualized = ann.) for various one-dimensional value strategies (DY) based on quarterly performance data. Portfolio reformation occurs yearly at the beginning of July

during the period from 1994/95 to 2008/09. Panels BD show the beta with respect to the European market index EuroStoxx, the quantile return standard deviations and

the return value premiums standard deviations (annualized = ann.) for various two-dimensional value strategies (DY and RoE, DY and Levy27, DY and MO3m) based on

quarterly performance data. Portfolio reformation occurs yearly at the beginning of July during the period from 1994/95 to 2008/09.

strategy combinations based on dividend yield (DY) exhibit the

smallest betas in the value quantile portfolios. If anything, the

superior performance of the strategies occurs disproportionally

during bad performances of the stock market (refer to the previous pages: performance in different market environments). The

difference in betas of less then 0.1 can explain only a small portion

of return difference41 and surely not the roughly 517% difference

in returns that we nd.

Additionally, Table 5, Panels AD present the annualized standard deviations of one- and two-dimensional strategy portfolio

quantile returns based on DY. It shows that value quantile portfolios

do not generally have higher standard deviations of returns then

glamour portfolios.42 For example, using the DY, RoE classication,

the value quantile portfolio has an average standard deviation of

returns of 17.8% compared to 21.9% for the glamour quantile. Some

remarks about these results are necessary. First, because of its much

higher mean return, the value strategys higher standard deviation

does not necessarily translate into greater downside risk. Second,

the small differences in standard deviations of returns between

value and glamour portfolios are quite small in comparison to the

difference in average return (around 517% per year). A risk model

based on differences in standard deviation cannot explain the superior returns on these strategies.

5. Conclusion

Value investing is an investment paradigm that derives from

the ideas on investment and speculation that Ben Graham & David

Dodd began teaching at Columbia Business School in 1928. Since

41

This conclusion is not valid for value strategies based on P/B where betas for the

value quantile portfolios seem to be substantially higher than for glamour portfolios.

42

It seems however that glamour and value strategies generally exhibit somewhat higher standard deviations than other portfolio quantiles or the total equally

weighted index.

that value stocks outperform glamour stocks and the market as a

whole. This article extended prevailing research on existing value

anomalies. It evaluated simple value strategies for the European

stock market (compared to many other studies that test market data on a country-by-country basis) as well as sophisticated

multi-dimensional value strategies that also include capital return

variables (Consistent Earner Strategy) and momentum factors (Recognized Value Strategy).

In Section 3 (a) of this analysis it was shown that a variety of simple classication schemes sorting value and glamour stocks based

on dividend yield (DY), price-to-book ratio (P/B) and price-toearnings ratio (P/E) produced superior returns for value portfolios

compared to glamour. As market proxy for the European market

the EuroStoxx index was selected. Return differentials (premiums)

between value and glamour varied between 5.40% and 12.66% per

annum on average depending on the selection criteria chosen during the period from July 15, 1994/95 to June 30, 2008/09.

Motivated by these results we subsequently examined portfolio

strategies based on two-dimensional selection criteria in Section

3.1 (b). First simple value measures (as evaluated in Section 3

(a)) were combined. It was shown that two-dimensional value

strategies (Multiple Value) based on a combination of simple value

strategies do not further improve investment performance and statistical signicance (in fact, investment returns were smaller and

statistically not signicant).

Subsequently more sophisticated two-dimensional value

strategies were evaluated. The Consistent Earner Strategy including capital return variables (e.g. RoE) resulted in investment

returns similar to simple value strategies but much better than

for single capital return variables. Return differences (premiums)

fall in a range between 6.43% and 14.78%. Statistical signicance

improved substantially.43 The Consistent Earner Strategy mimics

investment styles of well-know investors like Warren Buffett or

43

by focusing on nding an outstanding company at a sensible

price or buying cheap and good companies with competitive

advantages indicated by a high return on capital rather than

generic companies at a bargain price as originally promoted by

Graham and Dodd.

With regard to strategies combining momentum and value variables (Recognized Value Strategy), both investment performance

differences (premiums) and statistical signicance improved compared to simple value and/or simple momentum variables.

Investment returns fell in a range between 11.08% and 17.05% per

annum on average.44 The Recognized Value Strategy is based on the

stock momentum life cycle hypothesis45 stating that stocks move

alternately through periods of relative glamour and neglect

attempting to reconcile intermediate horizon momentum and long

horizon-reversals of behavioral nance theories.

Finally in Section 4 the question of whether strategies based

on investment criteria previously chosen are fundamentally riskier

was evaluated. Evidence could be provided that, in general, value

strategies based both on one- and two-dimensional simple value

criteria as well as sophisticated strategies including capital return

or momentum variables have outperformed glamour strategies

quite consistently without support for the hypothesis that value

strategies are fundamentally riskier.

References

Ball, R. (1978). Anomalies in relationships between securities yields and yieldsurrogates. Journal of Financial Economics, 6, 103126.

44

Momentum criteria here included representatively Levy27 and relative strength

3 month (MO3m).

45

Lee & Swaminathan (2000). Price momentum & trading value. Journal of Finance.

537

earnings ratios: A test of the efcient market hypothesis. Journal of Finance, 32,

663682.

Basu, S. (1983). Earnings yield and the size effect. Journal of Finance.

Chan, L., & Lakonishok, J. (2004). Value and growth investing: Review and update.

Financial Analysts Journal, 60(1), 7186. January/February.

De Bondt, W, & Thaler, R. (1985). Does the stock market overreact? Journal of Finance,

40, 793805.

Fama, & French. (1992). The cross-section of expected stock returns. Journal of

Finance, 46, 427466.

Fama, & French. (1998). Value versus Growth the International Evidence. Journal of

Finance.

Fama, E., & MacBeth, J. (1973). Risk, return and equilibrium: Empirical tests. Journal

of Political Economy, 81, 607636.

Gilovich, T., Grifn, D., & Kahneman, D. (Eds.). (2002). Heuristics and biases: The

psychology of intuitive judgment. Cambridge University Press.

Graham, B., & Dodd, D. (2005). Security analysis. McGraw-Hill.

Greenblatt, J. (2006). The little book that beats the market. Wiley & Sons.

Kahneman, & Tversky. (1979). Prospect Theory. Econometrica, 17, 263291.

Kahneman, D., & Riepe, M. (1998). Aspects of investor psychology. The Journal of

Portfolio Management, 24, 5265.

Lakonishok, Hamao, & Chan. (1991). Fundamentals and stock returns in Japan. Journal of Finance.

Lakonishok, Shleifer, & Vishny. (1994). Contrarian investment, extrapolation, and

risk. Journal of Finance.

Lee, C., & Swaminathan, B. (2000). Price momentum & trading value. Journal of

Finance.

Levy, Robert A. (1967). Relative strength as a criterion for investment selection.

Journal of Finance, V22, 595610.

Oyefeso, O. (2004). Literature survey of measurement of risk: The value premium.

Journal of Asset Management, 5(4), p. 277288, 12p.

Rosenberg, B., Reid, K., & Lanstein, R. (1984). Persuasive evidence of market inefciency. Journal of Portfolio Management, 11, 917.

- The Arms Index-EnЗагружено:sololeos
- Value InvestingЗагружено:pksref99
- Value InvestingЗагружено:tundeawo
- Interview with Guy Spier.pdfЗагружено:anandbajaj0
- Selection Among AlternativesЗагружено:Dave Despabiladeras
- ContentЗагружено:imtehan_chowdhury
- Third Point Q1 2010 Investor LetterЗагружено:guruek
- S&P Letter on Google Stock SplitЗагружено:Tom Gara
- Bca4040 Slm Unit 05Загружено:ParvinderSingh
- Management Strategies and Dynamic Financial AnalysisЗагружено:vasilev
- Carne Fact Sheet 06302013Загружено:CarneCapital
- MYP Fact Sheet 3-31-08Загружено:Matt
- Chap025.rtfЗагружено:ducacapupu
- PUF Fact Sheet 3-31-08Загружено:Matt
- Bershire Hathaway Owner's ManualЗагружено:Lao Quoc Buu
- Fami Save n LearnЗагружено:Emmanuel Bernardo
- Fmr July 2017Загружено:Salman Arshad
- jac tear sheet - january 2015 estimateЗагружено:api-250385001
- Intro Tom MSciЗагружено:Shahzad James
- Types of Mutual FundsЗагружено:Himanshu Porwal
- US Federal Reserve: ifdp688rЗагружено:The Fed
- ROI and Residuel Incom.docЗагружено:ParagChhipa
- asia-divFFS_EQ_IAPD_IE00B14X4T88_GB_en.pdfЗагружено:benedet6668321
- factfinderЗагружено:api-249217077
- COA_M2017-014 Cost of Audit Services Rendered to Water DistrictsЗагружено:Juan Luis Lusong
- UntitledЗагружено:api-245850635
- Lesson 1Загружено:Wilson
- InvestmentЗагружено:Duyen Tran
- Morning Star Report 20190726102401Загружено:Yumyum
- Weekly CallЗагружено:Sudipta Bose

- (bobadilla) 11 x09 capital budgeting.docЗагружено:Karen Labasan
- List of BooksЗагружено:stylinbytarun
- 2nd Mini Case StudyЗагружено:Marga Guilaran
- CAMDEN PROPERTY TRUST 10-K (Annual Reports) 2009-02-20Загружено:http://secwatch.com
- SDI Explanatory Note FORM 2Загружено:gannwong
- Finance League 2011 - Round 1Загружено:Prashant Verma
- CAPMЗагружено:praveenbtech430
- ACCT 551 Intermediate Accounting IIЗагружено:Alan Mark
- Advanced Capital Budgeting.pdf shiv1Загружено:Neha Sinha
- CHAPTER 3.docЗагружено:Marie Alkonga
- AirAsia Bursa Announcement - Q42017 27Feb18 FinalЗагружено:Henry Lee
- USEC IncЗагружено:highyieldblog
- Investment Banking Firms(Handouts)Загружено:Joyce Ann Sosa
- Marcato Capital Sothebys PresentationЗагружено:CanadianValue
- 162_DBSVickers_SuperGroup140520145b15dЗагружено:Invest Stock
- Acct 200 Chapter 7Загружено:Big Willy
- Chapter 3 - Gripping IFRS ICAP 2008 (Solution of graded questions)Загружено:Falah Ud Din Sheryar
- CAPM_ Theory, Advantages, And Disadvantages _ F9 Financial Management _ ACCA Qualification _ StudentsЗагружено:Waqas Rashid
- InglesЗагружено:Monita Marita Yupa
- FINA202 Ch 11 Slides 2017Загружено:xavi
- SPDR Barclays Capital Short Term Corporate Bond ETF 1-3YЗагружено:Roberto Perez
- Beat practices for long term wealth creation for mutual fund investors.Загружено:Masroor Azar Siddiqui
- Presentation on ESOPЗагружено:Priyanka Gurav
- Regulation, Transparency and Market Discipline (Kashif Ghani)Загружено:Kashif Ghani
- The First Sub-prime Mortgage Crisis and Its AftermathЗагружено:Alternative Economics
- T518_FABЗагружено:AlEp MyEyez AlEp
- Asso CompleteЗагружено:Ezzah Radzi
- MppaЗагружено:Arnold Steven
- A Comprehensive analysis between United Commercial Bank Ltd and Bank Asia based on Operating EfficiencyЗагружено:Ashik Ahmed Nahid
- QA Before Week 7 TuteЗагружено:Shek Kwun Hei