Analysis of contrarian strategies on risk dimension
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- Master Thesis 
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.