Resurrecting the Value Premium

27 Pages Posted: 5 Oct 2020 Last revised: 23 Oct 2020

See all articles by David Blitz

David Blitz

Robeco Quantitative Investments

Matthias X. Hanauer

Technische Universität München (TUM); Robeco Quantitative Investments

Date Written: October 15, 2020

Abstract

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. Our enhanced value strategy also suffers in recent years, but this is largely explained by an extreme widening of valuation multiples similar to the late nineties. We conclude that a solid 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

JEL Classification: G11, G12, G14

Suggested Citation

Blitz, David and Hanauer, Matthias Xaver, Resurrecting the Value Premium (October 15, 2020). Available at SSRN: https://ssrn.com/abstract=3705218 or http://dx.doi.org/10.2139/ssrn.3705218

David Blitz

Robeco Quantitative Investments ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

Matthias Xaver Hanauer (Contact Author)

Technische Universität München (TUM) ( email )

Arcisstr. 21
Munich, D-80290
Germany

HOME PAGE: http://www.professors.wi.tum.de/fm/team/researcher/dr-matthias-hanauer-cfa/

Robeco Quantitative Investments ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

HOME PAGE: http://www.robeco.com/en/insights/authors/matthias-hanauer.html

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