Factor/Style Investing

The Interaction of Value and Momentum Strategies

Topics - Factor/Style Investing Momentum Value

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The Interaction of Value and Momentum Strategies

Researchers have convincingly demonstrated that value strategies can be used to predict stock returns. For instance, Fama and French showed as much for value strategies based on the ratio of a firm’s book value to the market value of its equity. Similarly, Lakonishok, Shleifer and Vishny did the same for value strategies based on a firm’s cash-flow-to-price ratio.

Although conflicting explanations have been offered for the success of these strategies, the empirical evidence that they have worked is quite strong.

Researchers have also convincingly demonstrated that momentum strategies have power to predict stock returns. For instance, Jegadeesh and Titman showed that strategies that buy winners and sell losers based on returns over the previous 6 to 12 months generate excess returns. Asness showed that these strategies are effective even after accounting for common value measures. In particular, they are most effective when the definition of momentum excludes returns over the most recent month.

The evidence that momentum strategies work is convincing. As with the value strategies, however, the explanation of why they work is largely incomplete.

For this study, we examined whether value and momentum strategies are independent or related, asking how well value strategies work among stocks that have exhibited both strong momentum (winners) and weak momentum (losers). Similarly, we looked at momentum strategies among only high-value (cheap) or only low-value (expensive) stocks. We found that value works, in general, but that it is particularly strong among loser stocks and quite weak among winner stocks. Momentum also works, in general, but is particularly strong among expensive stocks.

Published in

Financial Analysts Journal

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This material is not research and should not be treated as research. This paper does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of AQR. The views expressed reflect the current views as of the date hereof and neither the author nor AQR undertakes to advise you of any changes in the views expressed herein. 

The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Charts and graphs provided herein are for illustrative purposes only. The information in this presentation has been developed internally and/or obtained from sources believed to be reliable; however, neither AQR nor the author guarantees the accuracy, adequacy or completeness of such information. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially, and should not be relied upon as such. Diversification does not eliminate the risk of experiencing investment losses.

The information in this paper may contain projections or other forward-looking statements regarding future events, targets, forecasts or expectations regarding the strategies described herein, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved, and may be significantly different from that shown here. The information in this document, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.