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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.
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.