Style Investing series updates (2005-2006) (From AXO and other sites)

Value versus Growth: Stochastic Dominance Criteria (2005)
=> Value > Growth when expansions. No clear evidence when recessions.

 The Anatomy of Value and Growth Stock Returns(2005)
=> Small Value > Large Value
=> Value stock capital gain mostly come from P/B expansion. Growth stock capital gain mostly come from reinvest on its earnings(making book value grow). However, not all growth stocks can maintain high profitability. Thus on average growth stocks P/B tends to fall
=> Value & Growth effect come from P/B ratio outpaces reinvestment of earnings.

Value versus Growth: Movements in Economic Fundamentals(2005)
=>Subject: What drives value premium? i) Is it because it is more risky? ii) Is it because of investor sentiment?

=> It shows the relatively sharp declines in earnings growth for the average value company during bad economic times value beats growth as a rational reward for the relatively higher risk inherent in the fundamental performance of value companies during recessions.


 Does the value premium Really exist in the UK Equity market? (2005)

=> Authors challenge existence of value premium. They find there is weak evidence the value premium exists in U.K.
=> The value premium is larger for stocks that satisfy two selection factors rather than one.
(Equal Weight PF에 대한 언급이 있었던 것을 체크해 볼것.)


Generating Excess Returns through Global industry rotation (2006)

=> Try to exploit cyclic industry returns, with U.S yield curve as the critical economic indicator.
(Styles : Momentum, Value, Combination, Growth)

=> Industry effect may be more important than country effects with respect to variability of global equity returns.

=> Industries with highest earnings yield outperformed those with lowest. But value strategy performed poorly on 1990s.

=> Industries with highest growth rates outperformed those with lowest. But value strategy performed poorly on 2000s.

=> When U.S yield curve is normal, momentum works. (value does not work)
=> When U.S yield curve is inverted, value works.

Cheap-Momentum winner vs Expensive-Momentum looser



 Institutional ownership and the Value premium (2006)


=> Can investor capture value premium by buying whole index? or should they focus on a identifiable subset?
=> Let's assume value premium is generated by irrational individual investors and also there exists rational institutional investors.

=> Stocks least held by institutional investors drive value prmium. Stocks most held by institutional investors exhibit no value premium.

=> Also, level of ownership is more important than (1) Size (2) idiosyncratic vol (3) numberof analyst following the stock.

The relation between time-series and cross-sectional effects of idiosyncratic variance in stock returns (2006)

=> Returns are rewarded by bearing risk. (high risk = high return)
=> Usually define risk as volatility. Then why high idiosyncratic vol stocks does not pay off?

=> Realized idiosyncatics volatility of individual stocks correlates negatively with future return.

=> They say that the underlying cause of the volatility premium and the value premium is sensitivity to discount rate shocks. Volatile (growth) stocks are very sensitive to discount rate shocks, while quiet (value) stocks are not.

=> Value stocks tend to be less volatile than growth stocks.


Migration (2006)

=> As companies evolve, their chracteristics may migrate from one another.

=>The value premium has three sources: (1) high returns on value stocks that improve toward growth (contributing about 3.5% per year to value portfolios); (2) low returns on growth stocks that deteriorate toward value (contributing 5.1% per year to the small stock value portfolio and 1.2% to the big stock value portfolio); and, (3) slightly higher returns for value stocks than growth stocks that remain in the same portfolio from year to year (contributing about 1% to the value portfolios).


=>Migration from small to big stocks add 2.9% per year to the average return on the small growth stocks and therefore work against the value premium.


Pricing Noise, Rejecting the CAPM and the Size and Value effect (2006)

=> The size and value premiums derive entirely from equity market pricing noise (not specific risk factors). This same noise effect also drives mean reversion of stock prices and contrarian excess profits.

=> small capitalization value investing works by systematically buying negative noise and selling positive noise.


Risk aversion and Clientele Effects (2006)

Are value(growth) investors risk aversions(lovers)?

=> Value investors avoid risk, while growth investors seek it.


=> Risk preferences of value investors are more persistent than those of growth investors, suggesting that value investors are less likely to chase returns.

=> Value-growth switchers react to past returns of the styles, and to changes in risks (volatilities) of the styles.

=> Trading strategies that sell near-term options in growth indexes, buy near-term options in value indexes and hold to expiration generate positive returns. Growth investors in aggregate will pay more for options than will value investors.


Does noise create the size and value effect? (2006)

=> Noise introduces random transients of inefficiency.

=>Value and size premiums are real manifestations of emergent patterns of noise. However they may persist pratical limit of arbitrage.

Corporate financing Activities and Contrarian Investment (2006)

=> Do companies with low fundamentals that buy back stocks outperform?

=> Value beats growth, and repurchasers beat issuers.


=> Value repurchasers on average dramatically outperform growth issuers. The four-year average annual size-adjusted return for a value repurchaser minus growth issuer portfolio is 9.4%, compared with just 5.2% for a broader value minus growth portfolio. Moreover, the comparable return on a value issuer minus growth repurchaser portfolio is only 0.2%.

=>Value repurchasers on average are not riskier than growth issuers.


=>Stock repurchasing may be essential to the value premium. There is a positive and significant relation between value indicators and returns only for subsamples with value and issuance/repurchase indicators pointing in the same direction.