Value And Momentum And Investment Anomalies

The predictive abilities of value and momentum strategies are among the strongest and most pervasive empirical findings in the asset pricing literature (here is a deep dive).

For example, the study “Value and Momentum Everywhere” by Clifford Asness, Tobias Moskowitz, and Lasse Pedersen, published in the June 2013 issue of The Journal of Finance, examined these two factors across eight different markets and asset classes (individual stocks in the U.S., the U.K., continental Europe, and Japan, as well as country equity index futures, government bonds, currencies, and commodity futures) and found:  

  • There are significant return premia to value and momentum in every asset class. The value premium was persistent in every stock market, with the strongest performance in Japan. The momentum premium was also positive in every market, especially in Europe, though statistically insignificant in Japan (see here for more details).
  • Value strategies are positively correlated with other value strategies across otherwise unrelated markets, and momentum strategies are positively correlated with other momentum strategies globally. This persistence assuages data mining concerns (see here for more details).
  • Value and momentum are negatively correlated with each other within and across asset classes. Their negative correlation and high positive expected returns imply that combining strategies result in improved Sharpe ratios.

Is There Value and Momentum in Anomalies?

Deniz Anginer, Sugata Ray, H. Nejat Seyhun, and Luqi Xu contribute to the literature on value and momentum with their February 2020 study “Value and Momentum in Anomalies.” They examined the performance of value and momentum across the following capital asset pricing model (CAPM) anomalies. Specifically, they investigated whether the time variation in the predictive ability of anomalies is random or serially correlated over time.

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Disclosure: Performance figures contained herein are hypothetical, unaudited and prepared by Alpha Architect, LLC; hypothetical results are intended for illustrative purposes only. Past ...

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