A study on relationship between the return of value/growth portfolio and market return: Evidence from Tehran Stock Exchange

Monireh Mashhadi Ramezanali,Mohammad Hassan Janani,Mohammadreza Setayesh

doi:10.5267/j.msl.2014.6.013

Abstract

Article history: Received January 4, 2014 Accepted 1 June 2014 Available online June 5 2014 This study examines the relationship between the returns of two value and growth portfolios and the return of market on 15 selected firms on Tehran Stock Exchange over the period 20082011. The study divides the firms into two groups in terms of the ratios of price on earning as well as price on book value into two groups of value and growth portfolios. Using some regression analysis, the study has determined a positive and meaningful relationship between value portfolio and market return when the market is on the upside but this relationship is not meaningful during the bear session. The results indicate that during the bull sessions, value portfolios provide better investment opportunities than growth ones do. © 2014 Growing Science Ltd. All rights reserved.

Highlights

The value effect, in which value stocks substantially outperform growth stocks for investors who can wait to ride out the often-extended time of growth, has been a controversial discussion for years (Sharpe, 1964; Arnott et al 2009; Fama & French, 1998, 2002, 2007; Mehra & Prescott, 1985). Bansal et al (2005) demonstrated that aggregate consumption risks embodied in cash flows could account for the puzzling differences in risk premia across book-to-market, momentum, and sizesorted portfolios
The study categorize the firms based on two ratio of price on earning (P/E) and price on book value (P/BV) into two groups of income and growth
The second hypothesis investigates whether the correlation between value portfolios is bigger than growth portfolios or not during the bull session

Summary

Introduction

The value effect, in which value stocks substantially outperform growth stocks for investors who can wait to ride out the often-extended time of growth, has been a controversial discussion for years (Sharpe, 1964; Arnott et al 2009; Fama & French, 1998, 2002, 2007; Mehra & Prescott, 1985). Bansal et al (2005) demonstrated that aggregate consumption risks embodied in cash flows could account for the puzzling differences in risk premia across book-to-market, momentum, and sizesorted portfolios. Bansal et al (2005) demonstrated that aggregate consumption risks embodied in cash flows could account for the puzzling differences in risk premia across book-to-market, momentum, and sizesorted portfolios. They discussed that cash flow risk was important for interpreting differences in risk compensation across assets. Blazenko and Fu (2013) proposed a new explanation for the valuepremium called the limits to growth hypothesis They found that profitability increases returns to a bigger extent for dividend-paying value companies compared with dividend-paying growth companies, which is consistent with a differential relation between profitability and risk. Lakonisho et al (1994) provided some evidence that value strategies could result higher returns because these strategies may exploit the suboptimal behavior of the typical investor and not because these strategies would be fundamentally riskier. Petkova and Zhang (2005) studied the relative risk of value and growth stocks and reported that time-varying risk could go in the right direction in explaining the value premium

The proposed model

The first hypothesis

The second hypothesis

Conclusion