Abstract
Much academic work has been done to prove that value premium exists. The center of debate however, lies on the reason for its existence. This paper will be a survey on different explanations to the existence of value premium which includes risk premium for value stocks, judgmental bias and agency costs, data mining, survivorship bias and company size’s premium. Among all, judgmental bias and agency costs comes out to be the one suffered from least counter-arguments.
Highlights
While the academic community generally agrees that value investing creates better returns than growth investing, much less consensus exists on the underlying reasons.This paper will be a survey on different explanations to the value premium
This paper will be a survey on different explanations to the existence of value premium which includes risk premium for value stocks, judgmental bias and agency costs, data mining, survivorship bias and company size’s premium
By comparing the performance of growth stocks and value stocks in different economic condition, they examined the downside risk of the value strategy which could be one of the factor of value premium not explained by beta and volatility
Summary
While the academic community generally agrees that value investing creates better returns than growth investing, much less consensus exists on the underlying reasons. Investors’ judgmental bias and agency costs seems to be the most plausible explanation
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