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What’s driving the value premium?

What’s driving the value premium?

06-04-2016 | From the field

The academic literature provides two competing theories on what drives the value premium: exposure to risk factors, or mispricing of securities. 

According to the first theory the anomalous returns should be concentrated in stocks that are highly sensitive to the Fama-French value factor (HML), while according to the second theory the returns should be concentrated in stocks with the most extreme valuation ratios. 

  • David Blitz
    David
    Blitz
    Head Quantitative Equities Research

This study* disentangles these two explanations and finds strong evidence in favor of the mispricing hypothesis. The authors also suggest that an improved value strategy may be constructed by selecting stocks which combine attractive valuation ratios with low correlations to the Fama-French value factor. 

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From the field
From the field

Our researchers publish many whitepapers based on their own empirical studies; they also follow quantitative research done by others. Head of Quant Equities Research David Blitz comments on notable external papers.

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