Working Paper: CEPR ID: DP12685
Authors: Clifford S. Asness; John M. Liew; Lasse Heje Pedersen; Ashwin K. Thapar
Abstract: We define “deep value” as episodes where the valuation spread between cheap and expensive securities iswide relative to its history. Examining deep value across global individual equities, equity index futures,currencies, and global bonds provides new evidence on competing theories for the value premium.Following these episodes, the value strategy has (1) high average returns; (2) low market betas, but highbetas to a global value factor; (3) deteriorating fundamentals; (4) negative news sentiment; (5) sellingpressure; (6) increased limits to arbitrage; and (7) increased arbitrage activity. Lastly, we find that deepvalue episodes tend to cluster and a deep value trading strategy generates excess returns not explained bytraditional risk factors.
Keywords: value investing; market efficiency; bubbles; behavioral finance; overreaction; demand pressure; arbitrage; noise
JEL Codes: G02; G11; G12; G14; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| value spreads (D46) | returns to value strategies (D46) |
| wider value spreads (G19) | higher expected returns (G12) |
| deep value episodes (D46) | high average returns to value strategies (D46) |
| deep value episodes (D46) | negative news sentiment (G41) |
| deep value episodes (D46) | increased selling pressure (E44) |
| market conditions (P42) | returns to value strategies (D46) |
| arbitrage activity increases during deep value periods (G14) | returns to value strategies (D46) |