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Analysis of contrarian strategies on risk dimension

Soud, Asma Salim; Konnestad, Tor Salve Halvorsen
Master thesis
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http://hdl.handle.net/11250/2560730
Issue date
2018
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  • Master Thesis [2971]
Abstract
The concept of value strategies outperforming glamour strategies have been

dominating in finance literature, but the reason is still contentious. In this thesis, we are

replicating the LSV paper and in addition to that, we analyze the source of value premium in

the dimension of risk. The risk characteristics we are using are Altman Z-score, Amihud

illiquidity, Share turnover Liquidity and Accruals. We undertake one-way classification of

stocks, forming decile portfolios of stocks on basis of the risk characteristics we construct.

Followed by double sorts of the risk characteristics with the book to market ratio. We use

Fama-MacBeth regression to investigate the importance of the variables in explaining returns.

We find that all variables are important. Lastly, we use our model which is inspired by the

Fama French three Factor model and Carhart model to investigate the abnormal return of

value minus glamour strategy. The results suggest that, the risk factor from Amihud illiquidity

(LIQ) and accruals (ACC) explain the value minus glamour strategy i.e. makes the abnormal

return of this strategy to be zero and statistical insignificant. These results hold in different

time periods, as well as when we adjust for small cap and penny stocks. From our findings,

we can say that abnormal return from the value minus glamour strategy is explained by

illiquidity risk and risk of stocks having low Accruals. We conclude that value strategies

outperform glamour strategies because they are fundamentally riskier.

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