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When do Value Stocks Outperform Growth Stocks? Investor Sentiment and Equity Style Rotation Strategies

31 Pages Posted: 27 Jun 2003  

Yul W. Lee

University of Rhode Island - College of Business Administration

Zhiyi Song

Bear, Stearns & Co., Inc.

Date Written: January 2003

Abstract

This paper investigates a relation between investor sentiment and performance of value stocks over growth stocks. To measure noise investors' sentiment, we use gauges: the CBOE equity put-call ratio and the market volatility (VIX) index. We find that value stocks tend to outperform growth stocks when the CBOE equity put-call ratio is relatively low or the VIX is relatively high. When the put-call ratio is relatively high or the VIX is relatively low, however, growth stocks marginally outperform or perform as well as value stocks. This finding suggests that the return premium of value stocks over growth stocks is at least partially influenced by investor sentiment. A strategy that switches equity styles on the basis of the put-call ratio seems to beat the benchmarks.

JEL Classification: G11, G14

Suggested Citation

Lee, Yul W. and Song, Zhiyi, When do Value Stocks Outperform Growth Stocks? Investor Sentiment and Equity Style Rotation Strategies (January 2003). EFMA 2003 Helinski Meetings. Available at SSRN: https://ssrn.com/abstract=410185 or http://dx.doi.org/10.2139/ssrn.410185

Yul W. Lee (Contact Author)

University of Rhode Island - College of Business Administration ( email )

Kingston, RI 02881
United States

Zhiyi Song

Bear, Stearns & Co., Inc.

245 Park Avenue
New York, NY 10167
United States

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