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What Drives the Value Effect? Risk versus Mispricing: Evidence from International MarketsDenis B. ChavesResearch Affiliates, LLC Jason C. HsuResearch Affiliates, LLC; University of California, Los Angeles - Anderson School of Business Vitali KalesnikResearch Affiliates LLC Yoseop ShimResearch Affiliates, LLC February 1, 2012 Abstract: Value stocks outperform growth stocks. The academic literature provides two competing theories on what drives the value premium: exposure to risk factors or mispricing of the securities. Existing empirical studies have not conclusively rejected one in support of the other. Using Fama and MacBeth (1973) regressions and extensions of the portfolio tests based on Daniel and Titman (1997), we provide evidence that the book-to-market characteristic largely subsumes the loading on the value factor (HML) as a variable that explains the cross-section of stock returns. We improve the power of existing tests by using data from 23 developed countries going back more than 30 years. Given these results, we conclude that mispricing is likely a more significant portion of the value premium.
Number of Pages in PDF File: 31 Keywords: value strategy, value premium, value factor, value investing JEL Classification: G14, G12, G10 working papers seriesDate posted: October 8, 2011 ; Last revised: February 14, 2012Suggested CitationContact Information
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