TITLE:
Value Premium and Portfolio Return Regime: Evidence from European Equities
AUTHORS:
Chikashi Tsuji
KEYWORDS:
Asset Pricing, European Equity Portfolio, Markov Switching Model, Value Premium
JOURNAL NAME:
Modern Economy,
Vol.9 No.3,
March
20,
2018
ABSTRACT: This paper examines the
profitability of four European higher return stock portfolios and their
linkages between the value premium factor return, high-minus-low (HML),
developed by Fama and French. Our fundamental analyses and quantitative
examinations using Markov switching models derive the following findings.
First, in the four higher return stock portfolios in Europe, the smallest and
the highest momentum portfolio shows the highest return. Second, the second
smallest and the highest book-to-market (BM) portfolio, the second smallest and
the highest operating profitability portfolio, and the second smallest and the
second lowest investment portfolio for Europe also demonstrate higher excess
returns than the overall stock market in Europe. Furthermore, we also
clarify that for all the four European stock portfolios, there clearly exist
two regimes: one is positively associated with the value premium factor return,
HML, and the other is negatively associated with HML. We further reveal that
recently, for all the four portfolios, the high value premium factor loading
regimes shift to the other regimes that are uncorrelated with HML. This
indicates that, in the recent periods, hedging and risk-diversification effects
can be recognized in investing
value stocks and the four higher return stock portfolios in Europe.