Value strategies : do stocks with low prices relative to fundamental measures of value outperform the market?

Abstract

This paper investigates weak-form market efficiency of the U.S. equity market by identifying market anomalies related to value strategies for portfolios formed on price-earnings, price-dividends, price-cash flow and five-year past sales rank. Value strategies are investment strategies based on buying stocks that have low prices relative to measures of value for the firms, such as earnings and dividends. We apply three asset pricing models to measure the performance of the strategies. The explanatory power of the models are evaluated and compared across subperiods. Our results indicate that three out of four value strategies outperform the market and that the more sophisticated asset pricing models capture variability in monthly stock returns to a greater extent. Furthermore, we show that the explanatory power of these models varies over time.