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Value Premium

Is there a reliable benefit from conventional value investing (based on the book-to-market value ratio)? these blog entries relate to the value premium.

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Book (Value) It?

In the September 2005 version of their paper entitled “The Anatomy of Value and Growth Stock Returns”, Eugene Fama and Kenneth French separate the average returns on both value and growth portfolios into dividends and three sources of capital gains: (1) reinvestment of earnings (growth in book value); (2) change in price-to-book ratios (P/B) due to mean reversion in profitability, and (3) a secular upward drift in P/B. Using data spanning 1926-2003 for NYSE, AMEX and NASDAQ stocks, they find that: Keep Reading

Value Versus Growth: The Winner Is…

In their August 2005 paper entitled “Value Versus Growth: Stochastic Dominance Criteria”, Abhay Abhyankar, Keng-Yu Ho and Huainan Zhao apply stochastic dominance techniques to assess the relative performance of value and growth investment strategies in U.S. equity markets over the past half century. These techniques: (1) compare entire return distributions (not just means or medians); (2) are independent of specific asset pricing models; and, (3) require only minimal assumptions about investor preferences. In this application, the assumptions are that investors always want more wealth, are risk-averse and accept small high-probability losses in exchange for huge low-probability returns. With these assumptions, stochastic dominance implies generation of greater wealth. Using a full sample covering 1951-2003 and a sub-sample covering 1963-1990 from the Kenneth French database, they find that: Keep Reading

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