Conditional Style Rotation Model on Enhanced Value and Growth Portfolios: The European Experience

Ron Bird and Lorenzo Casavecchia

No 2, Working Paper Series from The Paul Woolley Centre for Capital Market Dysfunctionality, University of Technology, Sydney

Abstract: Academic and professional attention has been devoted in the past to the analysis of the potential value-enhancement generated by strategies based on macroeconomic models and applied to portfolios or indexes of style classes. In this paper, we analyse the extent of the excess returns that can be potentially generated by rotating a portfolio between value and growth stocks in the European markets. We extend the results obtained by Bird and Casavecchia (Bird, R. and Casavecchia. L. (2007) Sentiment and financial health indicators for value and growth stocks: the European experience, European Journal of Finance, 13, pp. 769-793) when applying market sentiment and financial health indicators to stocks and document the extent to which macroeconomic factors convey information that is not already impounded in these indicators. We find that a strategy to rotate between portfolios, constructed on either single valuation metrics or their enhancement by market sentiment and a company’s financial strength, is typically consistent, monotonic, and in the expected direction. This highlights the proposition that the macroeconomic factors capture a cross-sectional variation that is not typically impounded in unconditional regression models on value and growth portfolios.

Keywords: style rotation; financial health; market sentiment; asset pricing anomalies (search for similar items in EconPapers)
JEL-codes: F47 G11 G15 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2008-05-01
New Economics Papers: this item is included in nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Journal Article: Conditional style rotation model on enhanced value and growth portfolios: The European experience (2011)
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