Monday, 3 March 2014

Contrarian Investment, Extrapolation, and Risk

Here's some new research out by professors Lakonishok, Shleifer and Vishny on the by now old debate about reasons value strategies outperform the market when it comes to investing in stocks.

For many years, scholars and investment professionals have argued that value strategies outperform the market. These value strategies call for buying stocks that have low prices relative to earnings, dividends, book assets, or other measures of fundamental value. While there is some agreement that value strategies produce higher returns, the interpretation of why they do so is more controversial. This article provides evidence that value strategies yield higher returns because these strategies exploit the suboptimal behavior of the typical investor and not because these strategies are fundamentally riskier.

Read the full paper in the Journal of Finance here.