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RIM-Based Value Premium and Factor Pricing Using Value-Price Divergence / Lin William Cong, Nathan Darden George, Guojun Wang.
- Format:
- Book
- Author/Creator:
- Cong, Lin William.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w30967.
- NBER working paper series no. w30967
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2023.
- Summary:
- We document that value-to-price, the ratio of Residual-Income-Model-based valuation to market price, subsumes the power of book-to-market ratio and many other value or quality measures in predicting stock returns. Long-short value-to-price portfolios hedge against momentum, revitalize the seemingly missing value premium over past decades, and generate significant returns after adjusting for common factors. The value-price-divergence (VPD) factor constructed from the average returns of these portfolios within small and big stocks is not spanned by these known factors. Max Sharpe ratio and constrained R-squared tests reveal that VPD is a better substitute for the traditional value factor and a four-factor model using the VPD, market, momentum, and size factors outperforms most extant benchmarks in explaining the cross-section of expected equity returns. The findings remain robust under alternative specifications of equity cost of capital.
- Notes:
- Print version record
- February 2023.
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