What Drives the Value Premium? Risk versus Mispricing: Evidence from International Markets

Journal of Investment Management, vol. 11, no. 4, 2013 (Fourth Quarter).

Posted: 8 Oct 2011 Last revised: 7 Feb 2017

See all articles by Denis B. Chaves

Denis B. Chaves

The Capital Group Companies

Jason C. Hsu

Research Affiliates; Rayliant Global Advisors; University of California, Los Angeles - Anderson School of Business

Vitali Kalesnik

Research Affiliates Global Advisors

Joseph (Yoseop) Shim

Research Affiliates, LLC

Date Written: February 1, 2012

Abstract

Value stocks outperform growth stocks. The academic literature provides two competing interpretations on what drives the value premium: exposure to risk factors or mispricing of securities. Existing empirical studies, which are largely based on U.S. data, have not conclusively rejected one theory in support of the other. Up to this point, large scale studies based on multiple countries have not been conducted. Past studies also employ data which end before 2000 and do not cover the tech bubble, the housing bubble, the global financial crisis and the European debt crisis, when the relative performance of value stocks was extremely volatile. Applying Fama and MacBeth (1973) two-stage cross-sectional regression and Daniel and Titman (1997) double-sorted portfolio methods to 30 years of cross sectional data from 23 developed countries, we find evidence that the value premium is driven by mispricing.

Keywords: value strategy, value premium, value factor, value investing

JEL Classification: G14, G12, G10

Suggested Citation

Chaves, Denis Biangolino and Hsu, Jason C. and Hsu, Jason C. and Kalesnik, Vitali and Shim, Joseph (Yoseop), What Drives the Value Premium? Risk versus Mispricing: Evidence from International Markets (February 1, 2012). Journal of Investment Management, vol. 11, no. 4, 2013 (Fourth Quarter)., Available at SSRN: https://ssrn.com/abstract=1940504 or http://dx.doi.org/10.2139/ssrn.1940504

Denis Biangolino Chaves

The Capital Group Companies ( email )

333 S. Hope Street, 53rd Floor
Los Angeles, CA 90071
United States

Jason C. Hsu (Contact Author)

Research Affiliates ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

HOME PAGE: http://www.jasonhsu.org

Rayliant Global Advisors ( email )

Hong Kong

University of California, Los Angeles - Anderson School of Business

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Vitali Kalesnik

Research Affiliates Global Advisors ( email )

16 Berkeley Street
London, W1J 8DZ
United Kingdom
+44 2039299880 (Phone)

HOME PAGE: http://https://www.researchaffiliates.com/en_us/home.html

Joseph (Yoseop) Shim

Research Affiliates, LLC ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States
949-325-8723 (Phone)

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