Risk Based Theories and the Value Premium
The value premium refers to the fact that stocks with priced at a low multiple of book value tend to perform better than would be explained by the Capital Asset Pricing Model. Proponents of the Efficient Market Hypothesis (EMH) argue that the value premium results from a risk factor not captured by Beta. Opponents argue that the value premium is evidence that the EMH is not valid.
Fama and French, among others, have developed models that attribute the value premium to risk factors. Typically these studies use company size as a proxy for liquidity risk. In the Review of Finance, Phalippou replicates these studies in their original form, and then using institutional ownership as an alternative liquidity proxy. In this second iteration, the value premium persists and cannot be explained by the risk factor models.
Phalippou concludes that if the value premium is attributable to risk factors, the risk factors are not the ones identified in previous research.
For more information, see all articles on: Behavioral Finance, Investing in Stocks, Passive Management, Portfolio Management, Research, Valuation See also:
The Intelligent Investor: The Classic Text on Value Investing
Financial Statement Analysis: A Practitioner's Guide, 3rd Edition
Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)
