Abstract
Value investment styles yield higher returns, on average, than investing in growth stocks. The literature is currently divided on the reasons for this finding. Fama and French (1998) suggest that value stocks are inherently more risky and this non-diversifiable risk should be rewarded in equilibrium. Lakonishok, Shleifer and Vishny (1994), argue that value investing has higher average returns because of irrational overreaction behavior by investors. Unlike other papers that focus on the value premium derived from returns, this paper looks at the long-run behavior of international value price premiums derived from price indices. We use Johansen (1991, 1995) cointegration methodology and find the existence of one cointegrating vector that supports the view that there is a long-run stationary relationship between value price premiums across international countries. This would suggest that a rational risk story is looking more appealing as an explanation for the value premium.
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