Important legal information

The content displayed on this website is exclusively directed at qualified investors, as defined in the swiss collective investment schemes act of 23 june 2006 ("cisa") and its implementing ordinance, or at “independent asset managers” which meet additional requirements as set out below. Qualified investors are in particular regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes and central banks, regulated insurance companies, public entities and retirement benefits institutions with professional treasury or companies with professional treasury.

The contents, however, are not intended for non-qualified investors. By clicking "I agree" below, you confirm and acknowledge that you act in your capacity as qualified investor pursuant to CISA or as an “independent asset manager” who meets the additional requirements set out hereafter. In the event that you are an "independent asset manager" who meets all the requirements set out in Art. 3 para. 2 let. c) CISA in conjunction with Art. 3 CISO, by clicking "I Agree" below you confirm that you will use the content of this website only for those of your clients which are qualified investors pursuant to CISA.

Representative in Switzerland of the foreign funds registered with the Swiss Financial Market Supervisory Authority ("FINMA") for distribution in or from Switzerland to non-qualified investors is Robeco Switzerland AG, Josefstrasse 218, 8005 Zürich, and the paying agent is UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zürich. Please consult www.finma.ch for a list of FINMA registered funds.

Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco/Robeco Switzerland product should only be made after reading the related legal documents such as management regulations, articles of association, prospectuses, key investor information documents and annual and semi-annual reports, which can be all be obtained free of charge at this website, at the registered seat of the representative in Switzerland, as well as at the Robeco/Robeco Switzerland offices in each country where Robeco has a presence. In respect of the funds distributed in Switzerland, the place of performance and jurisdiction is the registered office of the representative in Switzerland.

This website is not directed to any person in any jurisdiction where, by reason of that person's nationality, residence or otherwise, the publication or availability of this website is prohibited. Persons in respect of whom such prohibitions apply must not access this website.

I Disagree
What drives the value premium?

What drives the value premium?

16-10-2014 | Research

The empirical evidence for the presence of a value premium in stock markets is overwhelming. But why does this phenomenon exist? A new white paper examines a popular explanation.

  • David Blitz
    David
    Blitz
    PhD, Executive Director, Head of Quant Selection Research

Speed read:

  • We examine a popular explanation called the overreaction hypothesis
  • This hypothesis is based on the extrapolation of past sales or earnings growth
  • It attributes the value premium to behavioral factors
  • Generic value strategies cannot be enhanced significantly based on this hypothesis
  • We conclude that the evidence supporting it is quite weak

Reasons why value premium exists are debated

Although there is by now a consensus that a strong value premium is present in the data, the reasons why this phenomenon exists are still heavily debated. In previous research we provided strong evidence against the distress risk explanation, showing that although simple value strategies can get a large exposure to distressed stocks, this does not explain the high return of value stocks.

More risk-based explanations have been proposed in the literature, but next to that there is also a school of thought which attributes the value premium to behavioral factors. In this white paper (download below) we examine one such behavioral explanation, namely the overreaction hypothesis.

According to this hypothesis, value stocks do show lower growth rates in subsequent years, and growth stocks do show higher subsequent growth rates, but not nearly as long and to the extent needed to justify the differences in valuation assigned to them by the market.

Stay informed on Quant investing with monthly mail updates
Stay informed on Quant investing with monthly mail updates
Subscribe

Little empirical support for overreaction hypothesis

We find that although overreaction indicators appear to be fairly promising on a stand-alone basis, they are not really effective for enhancing a generic value strategy. Moreover, if we disentangle the contribution to return of various factors, valuation is significant while the overreaction indicators are not.

This indicates that valuation ratios are really driving differences in future stock returns. Based on these findings we conclude that the empirical support for the overreaction hypothesis is quite weak.

Leave your details and download the report.

Subjects related to this article are: