Resurrecting the Value Premium
23 Pages Posted: 5 Oct 2020
Date Written: September 30, 2020
The prolonged poor performance of the value factor has led to doubts about whether the value premium still exists. Some have noted that the observed returns still fall within statistical confidence intervals, but such arguments do not restore full confidence in the value premium. This paper adds to the literature by showing that the academic value factor, HML, has not only suffered setbacks in recent years but has, in fact, been weak for decades already. However, we show that the value premium can be resurrected using insights that are well documented in the literature or common knowledge among practitioners. In particular, we include more powerful value metrics, apply some basic risk management, and make more effective use of the breadth of the liquid universe of stocks. Although our enhanced value strategy also suffers in recent years, it has a solid long term track record that does not warrant existential concerns. We conclude that a healthy value premium is still clearly present in the cross-section of stock returns.
Keywords: Value Premium, Value Investing, Value Factor, HML, Factor Investing, Factor Premia, Smart Beta, Asset Pricing, Market Efficiency, Crowding, Data Mining
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation