Momentum
Value and Momentum Everywhere
June 1, 2013
Topics - Momentum Value Factor/Style Investing
We find consistent value and momentum return premia across eight diverse markets and asset classes, and a strong common factor structure among their returns. Value and momentum returns correlate more strongly across asset classes than passive exposures to the asset classes, but value and momentum are negatively correlated with each other, both within and across asset classes.
Our results indicate the presence of common global risks that we characterize with a three-factor model that describes a new set of 48 global across-asset-class test assets, the Fama–French portfolios and a variety of hedge fund indices. Global funding liquidity risk is a partial source of these patterns, which are identifiable only when examining value and momentum jointly across markets.
Our findings present a challenge to existing behavioral, institutional and rational asset pricing theories that largely focus on U.S. equities. The strong correlation structure among value and momentum strategies across such diverse asset classes is difficult to reconcile under existing behavioral theories, for example. The high return premium and Sharpe ratio of a global across-asset-class diversified value and momentum portfolio presents an even more daunting hurdle for rational risk-based models to accommodate than the traditional approach of considering either value or momentum separately in a single asset market.
In further investigating the underlying economic sources driving value and momentum returns, we hope our simple three-factor framework can be useful for future research that is becoming increasingly concerned with pricing global assets across markets.
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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The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons.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.
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