Tim Olson
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45 lines
2.4 KiB
Markdown
45 lines
2.4 KiB
Markdown
---
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description: "Buys stocks with high Book-to-Price ratios (cheap) and shorts stocks with low Book-to-Price ratios (expensive), exploiting the empirical value premium."
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tags: [stocks, value]
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---
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# Value
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**Section**: 3.3 | **Asset Class**: Stocks | **Type**: Value
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## Overview
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The value strategy follows the same long-winner/short-loser structure as momentum strategies, but the selection criterion is a value metric rather than past returns. The most common value metric is the Book-to-Price (B/P) ratio. Stocks with high B/P are considered "cheap" (value stocks) and tend to outperform; stocks with low B/P are "expensive" (growth stocks) and tend to underperform.
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## Construction / Signal
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The primary signal is the Book-to-Price ratio:
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```
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B/P = Book value per share outstanding / Current stock price
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```
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Note: the B/P ratio is equivalent to the Book-to-Market ratio where "Market" is market capitalization (price × shares outstanding) rather than total book value.
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Stocks are sorted by B/P in descending order. A zero-cost (dollar-neutral) portfolio is constructed by buying top-decile stocks (high B/P, cheap) and shorting bottom-decile stocks (low B/P, expensive).
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## Entry / Exit Rules
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- **Entry**: Buy top-decile stocks by B/P; short bottom-decile stocks by B/P.
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- **Exit**: Hold for 1–6 months; rebalance periodically as book values are updated (typically quarterly with earnings releases).
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- **Portfolio**: Dollar-neutral long/short construction.
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## Key Parameters
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- **Value metric**: B/P ratio (Book-to-Price = Book-to-Market)
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- **Holding period**: Typically 1–6 months
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- **Price definition**: Asness, Moskowitz and Pedersen (2013) use current (most up-to-date) prices; Fama and French (1992) use prices contemporaneous with the book value
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## Variations
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- **Alternative value metrics**: Earnings-to-Price (E/P), Sales-to-Price, Cash Flow-to-Price, Dividend Yield
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- **Price timing**: Current price vs. price at book value date changes the B/P ratio and can affect performance
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- **Long-only**: Buy only top-decile value stocks
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## Notes
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- The value premium is a well-documented anomaly (Fama and French three-factor model).
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- Value and momentum are empirically negatively correlated, making them natural complements in a multifactor portfolio (see Section 3.6).
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- Holding period is typically 1–6 months.
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- Book value data lags the market; stale book values can introduce noise.
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- Value strategies can suffer extended drawdowns during "growth" regimes.
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