Is Value Really Riskier than Growth? An Answer with Time-Varying Return Reversal
42 Pages Posted: 17 Mar 2006 Last revised: 26 Feb 2014
Date Written: November 5, 2011
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: Suggested Citation