Price of Value and the Divergence Factor
46 Pages Posted: 1 Mar 2017 Last revised: 9 May 2018
Date Written: April 24, 2018
Price of Value, measured by the ratio of market price to accounting-based valuation, subsumes the power of book-to-market and to a large extent of various quality measures in predicting the cross-section of average returns. Price-of-value strategies generate significantly higher returns than traditional value and other anomaly strategies even after common factors adjustments, and provides natural hedge against momentum strategies. A four factor model using the Market, Small-Minus-Big, Momentum, and Price-Value Divergence Factor improves over alternative factor models.
Keywords: Factor models, asset pricing, anomalies, market efficiency, value investing
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