Working Paper: NBER ID: w4360
Authors: Josef Lakonishok; Andrei Shleifer; Robert W. Vishny
Abstract: For many years, stock market analysts have argued that value strategies outperform the market. These value strategies call for buying stocks that have low prices relative to earnings, dividends, book assets, or other measures of fundamental value. While there is some agreement that value strategies produce higher returns, the interpretation of why they do so is more controversial. This paper provides evidence that value strategies yield higher returns because these strategies exploit the mistakes of the typical investor and not because these strategies are fundamentally riskier.
Keywords: Value Strategies; Contrarian Investment; Market Performance; Behavioral Finance
JEL Codes: G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| naive investor behavior (G41) | mispricing in stocks (G10) |
| mispricing in stocks (G10) | contrarian investors exploit (G40) |
| value strategies (D46) | outperform the market (G17) |
| value stocks (G12) | not fundamentally riskier than glamour stocks (G40) |
| economic recessions (F44) | performance of value stocks (G12) |