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Deep Value

Last Updated on 10 February, 2024 by Rejaul Karim

The research paper authored by Clifford S. Asness, John M. Liew, Lasse Heje Pedersen, and Ashwin K Thapar delves into the concept of “Deep value,” characterizing episodes where the valuation spread between undervalued and overvalued securities deviates substantially from historical norms.

With a comprehensive analysis encompassing global individual equities, equity index futures, currencies, and global bonds, the study sheds light on the value premium through a convergence of evidence from diverse financial markets.

Notably, the findings reveal multifaceted attributes of the value strategy, including distinct market behavior, sentiment indicators, and arbitrage dynamics, providing valuable insights into the complex interplay of factors influencing investment returns.

Moreover, the study uncovers the tendency for deep value episodes to cluster, further emphasizing the capacity of a deep value trading strategy to yield excess returns beyond traditional risk factors.

Abstract Of Paper

We define “deep value” as episodes where the valuation spread between cheap and expensive securities is wide relative to its history. Examining deep value across global individual equities, equity index futures, currencies, and global bonds provides new evidence on competing theories for the value premium.

Following these episodes, the value strategy has:

(1) high average returns;

(2) low market betas, but high betas to a global value factor;

(3) deteriorating fundamentals;

(4) negative news sentiment;

(5) selling pressure;

(6) increased limits to arbitrage; and

(7) increased arbitrage activity.

Lastly, we find that deep value episodes tend to cluster and a deep value trading strategy generates excess returns not explained by traditional risk factors.

Original paper – Download PDF

Here you can download the PDF and original paper of Deep Value.

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Author

Clifford S. Asness
AQR Capital Management, LLC

John M. Liew
AQR Capital Management, LLC

Lasse Heje Pedersen
AQR Capital Management, LLC; Copenhagen Business School – Department of Finance; New York University (NYU); Centre for Economic Policy Research (CEPR)

Ashwin K Thapar
AQR Capital Management, LLC

Conclusion

In conclusion, the study on “Deep Value” by Clifford S. Asness, John M. Liew, Lasse Heje Pedersen, and Ashwin K Thapar offers compelling insights into the dynamics of deep value episodes and their impact on investment strategies.

Through a meticulous examination across global financial markets, the research unravels the distinct attributes of the value strategy, demonstrating not only high average returns but also unique market behaviors, sentiment indicators, and arbitrage dynamics following these episodes.

The clustering tendency of deep value episodes underscores their significance, while the ability of a deep value trading strategy to yield excess returns beyond traditional risk factors highlights the unexplored potential within value investing.

These findings not only contribute to the understanding of market efficiency and investment anomalies but also lay the groundwork for further exploration into the complexities of value investing in the realm of behavioral finance and market dynamics.

Related Reading:

Value Return Predictability Across Asset Classes and Commonalities in Risk Premia

Liquidity Risk After 20 Years

FAQ

What is the main concept explored in the research paper on “Deep Value”?

The main concept explored in the research paper is “deep value,” characterized by episodes where the valuation spread between undervalued and overvalued securities deviates substantially from historical norms. The study comprehensively analyzes deep value across global individual equities, equity index futures, currencies, and global bonds to provide new evidence on the value premium.

What multifaceted attributes of the value strategy are revealed by the findings?

The findings of the study reveal multifaceted attributes of the value strategy. These include distinct market behavior, sentiment indicators, and arbitrage dynamics following deep value episodes. The value strategy demonstrates high average returns, low market betas but high betas to a global value factor, deteriorating fundamentals, negative news sentiment, selling pressure, increased limits to arbitrage, and increased arbitrage activity.

How does the research contribute to the understanding of the value premium and competing theories for it?

The research contributes to the understanding of the value premium by providing evidence on competing theories for it. By examining deep value across various financial markets, the study sheds light on the dynamics of value investing and its impact on investment returns. The findings offer insights into the complex interplay of factors influencing the value premium and contribute to the ongoing discussion and theories surrounding this phenomenon.

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