Searching for Inner Peace with Value Factors

Abstract

Value factors have always been an essential part of quantitative investing processes. We show that the deterioration in performance of value stocks, as defined by high book-to-price (B/P) ratios, comes as no surprise given their relatively poor fundamentals as well as slower mean reversion of profitability. The opposite has been observed for low B/P “glamour” stocks. Value defined by high earnings yield (E/P) has also suffered from deteriorating performance despite being fundamentally different from value characterized by a high B/P.

Keywords: value investing, profitability, mean reversion, valuation, growth

JEL Classification: G11, G12, G14, M41