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Is Value Really Riskier than Growth? An Answer with Time-Varying Return Reversal

42 Pages Posted: 17 Mar 2006 Last revised: 26 Feb 2014

Soosung Hwang

Sungkyunkwan University - Department of Economics

Alexandre Rubesam

IESEG School of Management

Date Written: November 5, 2011

Abstract

We investigate the dynamics of the value anomaly in order to identify the driving forces of the anomaly. We show that the large positive value-minus-growth portfolio returns are explained by an over-reaction (under-reaction) to the positive (negative) market movements in short, specific time periods, during which the average returns of value-minus-growth portfolios are more than 2% a month. We propose an explanation based on behavioral biases: the dynamics of the value anomaly reflect the increased speed of return reversals subsequent to overreaction. Two conditions that increase the return reversals are proposed: when investors respond to public signals asymmetrically or when public signals become noisy. Our empirical results reveal that the value anomaly is explained by either one of these two channels.

Keywords: Overconfidence, Self-attribution bias, Value anomaly, Return reversals

JEL Classification: G12

Suggested Citation

Hwang, Soosung and Rubesam, Alexandre, Is Value Really Riskier than Growth? An Answer with Time-Varying Return Reversal (November 5, 2011). AFA 2007 Chicago Meetings Paper; A revised version is published in Journal of Banking and Finance, Vol. 37, No. 7, 2013. Available at SSRN: https://ssrn.com/abstract=891707 or http://dx.doi.org/10.2139/ssrn.891707

Soosung Hwang

Sungkyunkwan University - Department of Economics ( email )

25-2 Sungkyunkwan-ro
Jongno-Gu
110-745 Seoul
+82 (0)2 760 0489 (Phone)
+82 (0)2 744 5717 (Fax)

Alexandre Rubesam (Contact Author)

IESEG School of Management ( email )

Socle de la Grande Arche
1 Parvis de la Defense
Puteaux, Paris 92800
France

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