Value And Momentum And Investment Anomalies

The authors began by first defining “anomaly momentum” as the future abnormal returns to anomaly-identified stocks that exhibit better (or more positive) returns than other anomalies. They then defined “anomaly value” as the future abnormal returns to anomaly-identified stocks that exhibit higher recent book-to-market ratios. Their sample includes U.S. stocks over the period January 1975 through December 2014.

The following is a summary of their findings:

  • There is significant persistence in the relative rankings of anomalies with respect to their past one-month returns, as well as their past year’s historical adjusted book-to-market ratio — 77 (85)% of the anomalies exhibit a relative (absolute) momentum.
  • Anomalies that have performed well in the past month continue to outperform those that have performed poorly by about 60 basis points (bps) per month. The performance is stronger for absolute momentum.  
  • Anomalies that exhibit a value orientation outperform anomalies that exhibit a growth orientation going forward by about 30 bps per month—77% of the anomalies exhibit a relative value effect.
  • Their strategy significantly outperforms a naive diversification strategy of equal weighting across anomalies.
  • The performance of their strategy improves using absolute momentum (time series) and value rankings instead of relative rankings (cross-sectional).
  • Combining momentum and value to construct the “super winner” portfolio, investing in the anomalies that are both “winning” in terms of past month’s performance and “winning” in terms of past year’s historical adjusted book-to-market ratio, results in an abnormal return of 1.08% per month. In contrast, the “super losing” portfolio (“losing” past performance as well as past adjusted book-to-market ratio) has an abnormal return of only 0.11% per month. Hence, investing in super winning portfolios generates an additional 0.97% per month.
  • Their results are robust to a wide variety of specifications.
  • The anomaly momentum/value is distinct from and cannot be explained by individual stock momentum/value or industry momentum/value.
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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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