Value Bubbles

37 Pages Posted: 1 Jul 2019 Last revised: 21 Dec 2023

See all articles by Messaoud Chibane

Messaoud Chibane

Neoma Business School

Victoria Dobrynskaya

School of Finance, HSE University

Samuel Ouzan

Neoma Business School

Date Written: June 30, 2019

Abstract

The study reveals that the historical performance of value strategies is primarily driven
by occasional bubbles. Behavioral theories suggest the value premium should vary with
extended lagged market return or other aggregate proxies of investor sentiment—a hypothesis
supported by our cross-sectional tests. From 1926 to 2022, following two years of negative
market returns, we find that the U.S. value premium is about three times its unconditional
counterpart, whereas it appears to vanish following two years of positive market returns.
Additionally, periods of substantial losses in momentum strategies (momentum crashes)
very often coincide with substantial profits in value strategies (value bubbles). Leveraging
these insights, we develop a positively skewed, implementable dynamic investment strategy,
enhancing the Sharpe ratio of standard value and momentum strategy by over threefold and
60%, respectively. Our findings are internationally robust.

Keywords: Biases; Contrarian; Market Anomalies; Market Efficiency; Market States, Over-reaction; Value Premium

JEL Classification: G10, G11, G40, G41

Suggested Citation

Chibane, Messaoud and Dobrynskaya, Victoria and Ouzan, Samuel, Value Bubbles (June 30, 2019). Available at SSRN: https://ssrn.com/abstract=3412459 or http://dx.doi.org/10.2139/ssrn.3412459

Messaoud Chibane (Contact Author)

Neoma Business School ( email )

1 Rue du Maréchal Juin
Mont Saint Aignan Cedex, 76825
France

Victoria Dobrynskaya

School of Finance, HSE University ( email )

https://www.hse.ru/eng
Moscow
Russia

Samuel Ouzan

Neoma Business School ( email )

1 Rue du Maréchal Juin
Mont Saint Aignan Cedex, 76825
France

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