What Drives the Value Premium? Risk versus Mispricing: Evidence from International Markets
Journal Of Investment Management (JOIM), Fourth Quarter 2013
Posted: 15 Nov 2014
Date Written: May 21, 2014
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 premium, mispricing, risk, value, growth, book-to-market ratio, beta, HML
JEL Classification: G00
Suggested Citation: Suggested Citation