Investigating value and growth : what labels hide ?

Value and growth investment styles are a concept which has gained extreme popularity over the past two decades, probably due to its practical efficiency and relative simplicity. We study the mechanics of different factors' impact on excess returns in a multivariate setting. We use a panel of stock returns and accounting data from 1979 to 2007 for the companies listed on NYSE without survivor bias for clustering, regression analysis and constructing style based portfolios. Our findings suggest that value and growth labels often hide important heterogeneity of the underlying sources of risks. Many variables, conventionally used for style definitions, cannot be used jointly, because they affect returns in opposite directions. A simple truth that more variables does not necessarily mean better model nicely summaries our results. We advocate a more flexible approach to analyzing accounting-based factors of outperformance treating them separately before or instead of aggregating.Style analysis, value puzzle, pricing anomalies, equity.

Investigating value and growth : what labels hide ?

URL des Documents de travail :http://ces.univ-paris1.fr/cesdp/CESFramDP2007.htmDocuments de travail du Centre d'Economie de la Sorbonne 2007.66 - ISSN : 1955-611XValue and growth investment styles are a concept which has gained extreme popularity over the past two decades, probably due to its practical efficiency and relative simplicity. We study the mechanics of different factors' impact on excess returns in a multivariate setting. We use a panel of stock returns and accounting data from 1979 to 2007 for the companies listed on NYSE without survivor bias for clustering, regression analysis and constructing style based portfolios. Our findings suggest that value and growth labels often hide important heterogeneity of the underlying sources of risks. Many variables, conventionally used for style definitions, cannot be used jointly, because they affect returns in opposite directions. A simple truth that more variables does not necessarily mean better model nicely summaries our results. We advocate a more flexible approach to analyzing accounting-based factors of outperformance treating them separately before or instead of aggregating.Les styles d'investissement valeur et croissance est un concept devenu extrêmement populaire durant les deux dernières décennies ce qui est dû à son efficacité pratique et sa simplicité. Nous étudions l'impact de différents facteurs sur les rendements excessifs dans le cadre multi-varié. Nous utilisons un panel de rendements de titres et de données comptables des entreprises cotées sur le NYSE sans biais de survie pour les années 1979 - 2007 afin d'effectuer un clustering, la régression approprié et la construction des portefeuilles valeur et croissance. On trouve une hétérogénéité importante des facteurs de risque sous-jacents. Parmi les variables traditionnellement utilisées pour définir les styles, on distingue celles qui sont complémentaires et celles qui agissent dans les directions opposées dans le cadre multi-varié, ce qui rend leur utilisation simultanée inefficace. L'ajout de variables supplémentaires n'améliore pas forcément le résultat. Une approche plus flexible à l'analyse de facteurs comptable est proposée

Performance of Momentum and Contrarian Strategies in Commodity Markets

Momentum and contrarian anomalies have been detected in financial markets by multiple previous studies such as De Bondt & Thaler (1985) and Jegadeesh & Titman (1993). The effects of short-term continuation and long-term reversal have proven to be one of the strongest market anomalies and are shown to exist in different geographical areas and across various asset classes (Fuertes & Miffre: 2007; Assness, Moskowitz & Pedersen: 2013). The purpose of this thesis is to examine whether short-term continuation and long- term continuation exist in the commodity markets and do the strategies examined have a potential in portfolio diversification and inflation hedging. This thesis examines 16 short-term momentum and 9 long-term contrarian strategies in commodity markets. The data used in this thesis covers a time period of January 2000 to December 2018. The purpose is to examine if the strategies examined, are able to produce excess returns in various ranking and holding periods and are they sensitive to these factors. The profitability of the strategies is also tested by using a multifactor model which tests whether the returns of the strategies are compensations for the risk. The correlations between the returns of the strategies and asset classes such as bonds, equities and commodities is also examined. Furthermore, this thesis examines the possible inflation hedging properties of the strategies by examining the correlations between the strategy returns and inflation. The results obtained in this thesis suggest that the contrarian strategies in commodity markets are not able to produce excess returns. However, 12 out of the 16 momentum strategies are able to generate positive and significant returns with an average of 6.63% annually. Furthermore, the returns cannot be considered as compensation for the risk. In addition, the momentum strategies in commodity markets do have benefits in portfolio diversification due to the low correlation with other traditional asset classes. However, the results for the inflation hedging benefits are controversial and do not suggest that the strategies work in inflation hedging

Systematic risk factors in stock pricing modeling: A new theoretical conceptualization.

Stock pricing modeling in both modern- and behavioral finance paradigms are remain divided, still incomplete and have been criticized for some philosophical, theoretical and model limitations. These cause the identification of risk factors in stock pricing modeling to remain puzzling. This analytical conceptual paper aims to address these issues with a new theoretical conceptualization of the risk factors in stock pricing modeling

A Spatio-Temporal Model of House Prices in the US

The purpose of this paper is to apply recent advances in the econometrics of panel data to a problem that has a clear spatial dimension. We model the dynamic adjustment of real house prices using data at the level of US States. In the last decade, in most OECD countries there has been a significant rise in real house prices. This attracted the attention of many international organisations and central banks. In this paper we consider interactions between housing markets by examining the extent to which real house prices at the State level are driven by fundamentals such as real income, as well as by common shocks, and determine the speed of adjustment of house prices to macroeconomic and local disturbances. We take explicit account of both cross sectional dependence and heterogeneity. This allows us to find a cointegrating relationship between house prices and incomes and to identify a small role for real interest rates. Using this model we then examine the role of spatial factors, in particular the effect of contiguous states by use of a weighting matrix. We are able to identify a significant spatial effect, even after controlling for State specific real incomes, and allowing for a number of unobserved common factors.house price, cross sectional dependence, spatial dependence

Panels with Nonstationary Multifactor Error Structures

The presence of cross-sectionally correlated error terms invalidates much inferential theory of panel data models. Recently work by Pesaran (2006) has suggested a method which makes use of cross-sectional averages to provide valid inference for stationary panel regressions with multifactor error structure. This paper extends this work and examines the important case where the unobserved common factors follow unit root processes and could be cointegrated. It is found that the presence of unit roots does not affect most theoretical results which continue to hold irrespective of the integration and the cointegration properties of the unobserved factors. This finding is further supported for small samples via an extensive Monte Carlo study. In particular, the results of the Monte Carlo study suggest that the cross-sectional average based method is robust to a wide variety of data generation processes and has lower biases than all of the alternative estimation methods considered in the paper.cross section dependence, large panels, unit roots, principal components, common correlated effects

Equity Style Investing

Despite the well documented benefits of equity style investing in today’s financial markets, the academic view of the underlying cause for such benefits remains an ongoing debate. A number of theories have been proposed to explain why some asset classes earn better returns than others do under the same economic regimes. Rational finance links the outperformance of some stock groups to the equity characteristics that proxy for the common risk factors, behavioural finance, however, argues that mispricing resulting from irrational investor’s sentiment to fundamentals plays a key role. Meanwhile, a variety of business cycle variables have also suggested to contain information useful in explaining the expected stock returns. The observed style returns change all the time with predictable time-varying components, reflecting the structural and cyclical shocks to the macroeconomy. Motivated by the current ongoing controversy of anomaly versus risk compensation over interpreting equity style premiums, this thesis investigates how firm characteristics and business cycle conditions function separately to affect the style return dynamics based on the size and value-growth categorisations. It adds to the extant literature by explicitly examining the relative importance of the common risk factors versus firm-specific information as driving sources in the divergent equity style returns in the U.K. market. By identifying the dominant driving force that determines the relative style performance, it provides a further dimension to the current debate regarding the sources of style premiums and offers the choice of corresponding style investing strategies. The divergent style returns and its time-varying nature offer astute investors the opportunity to implement active style management to enhance portfolio returns. Motivated by the benefits of capitalising on such style return cyclicality and in particular the availability and popularity of Exchange Traded Funds based on market segments in leading financial markets as investment vehicle that offers low cost and high liquidity, this thesis examines a dynamic long-short tactical trading strategy by applying a binomial approach to focus on the rotation between pairs of equity styles. By answering key questions of whether equity style cycles exist in the U.K. market and whether the return dynamics of such style momentum strategy is distinct from the price and industry momentum effects, it contributes to the literature by providing valuable empirical evidence to compare with other studies in different economic and institutional environments. In response to the increasing popularity of using macro information to aid optimal style selection for the quant circles in the investment community, building on the methodology of Brandt and Santa-Clara (2006), this thesis approximates a solution of a mean-variance multi-style investor’s optimal style investing problem incorporating the business cycle predictability. This approach is parsimonious as the optimal style weights are parameterised directly on a set of pervasive business cycle predictors. By exploring how the distributions of the expected style returns and the location or the shape of the optimal style allocations are affected by given shocks to the business cycles, this thesis contributes to the extant literature by demonstrating the transmission mechanism of how business cycle volatility affects equity style return volatility and in turn a mean-variance investor’s optimal style allocation

Momentum Effects and Mean Reversion in Real Estate Securities

This article is the winner of the International Real Estate Investment/ Portfolio Management manuscript prize (sponsored by LaSalle Investment Management) presented at the American Real Estate Society Annual Meeting. This article tests for the presence of both price continuation and price reversals in international real estate securities. The results reveal evidence of performance persistence in international markets over short and medium term horizons, however the evidence on price reversals is less compelling. The empirical analysis tests for mean reversion using Variance Ratio and Augmented Dickey-Fuller tests. In neither case is there consistent evidence of mean reversion in international real estate securities. The portfolio switching tests do reveal some evidence of performance reversals. However, while under-performing markets do outperform over longer horizons, they do not do so at statistically significant levels.

Multifactor analysis on gender (in)equality. The case of Germany

Treballs Finals del Màster en Oficial en Empresa Internacional / International Business, Facultat d'Economia i Empresa, Universitat de Barcelona. Curs: 2020-2022. Tutor: Patricia ElgoibarGender equality is a goal for the sustainable development of nations and individuals (United Nations, 2022). Long-term sustainable economic and social development in developed nations like Germany is highly dependent on gender equality (WSJ, 2021). Germany is well known for its female leaders in one of the most powerful positions like Angela Merkel as a former Chancellor or Ursula von der Leyen as the President of the European Parliament and Annalena Baerbock as Minister for Foreign Affairs. However, Germany remains to be among the most gender unequal countries in Europe. Major stumbling blocks to the equality of genders are inequalities in job positions, salaries, and promotion in the job environment. This master thesis aims to contribute by understanding which factors influence gender (in)equality in the case of Germany. A multifactor analysis on the psychological, social, economic, and legal factors