Unraveling the value premium: a reward for risk or mispricing?

Claudio E. Serur, Julián R. Siri, Juan A. Serur and Jose Dapena ()

No 704, CEMA Working Papers: Serie Documentos de Trabajo. from Universidad del CEMA

Abstract: A value investing strategy consists of purchasing stocks relatively undervalued to their funda-mental values and selling those relatively overvalued. Finding this kind of companies has been one of the most challenging goals for investors throughout the history. The main objective of this paper is to test the value factor, but not limited to the traditional Price-To-Book ratio, but explor-ing diverse alternatives constructed on different metrics in order to determine if it possible to obtain excess returns relative to the traditional one. In addition, these factors were blended dif-ferent quality factors. First, we tested the so-called high mispricing portfolios, with long positions in value/high quality stocks and short positions in growth/low quality stocks. When blending these portfolios with quality factors, we observe quite an improvement in terms of Sharpe Ratio and maximum drawdowns relative to pure value portfolios. In this case, we see that excluding riskier low-quality stocks reduces the overall risk of the portfolio. Regarding the low mispricing portfolio, the results show that growth/high quality stocks outperform value/low quality stocks. This is consistent with the hypothesis of behavioral-based theories as we see that only underval-ued and high-quality stocks generate excess returns. Finally, we test the results against the three-factor Fama-French models, achieving statistically significant alphas in some cases.

Keywords: Factor investing; factor models; quality factor; excess returns; value investing. (search for similar items in EconPapers)
JEL-codes: C1 C3 G11 N2 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2019-11
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Persistent link: https://EconPapers.repec.org/RePEc:cem:doctra:704

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