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Global Return Premiums on Earnings Quality, Value, and Size: A Comprehensive Analysis

Last Updated on 10 February, 2024 by Rejaul Karim

Global Return Premiums on Earnings Quality, Value, and Size” is a research paper by Max Kozlov and Antti Petajisto that examines the return premium on stocks with high earnings quality using a comprehensive and recent global dataset covering all developed markets between July 1988 and June 2012.

The authors identify that a straightforward strategy of being long on stocks with high earnings quality and short on stocks with low earnings quality yields a higher Sharpe ratio compared to the overall market or similar strategies focusing on value or small stocks. These results persist in the overall sample and in the more recent period since 2005.

Interestingly, due to the negative correlation between the global earnings quality portfolio and a value portfolio, investors seeking exposure to both can achieve significant diversification benefits, thus enhancing their investment performance.

Abstract Of Paper

We investigate the return premium on stocks with high earnings quality using a broad and recent global dataset covering all developed markets from 7/1988 to 6/2012. We find that a simple strategy that is long stocks with high earnings quality and short stocks with low earnings quality produces a higher Sharpe ratio than the overall market or similar strategies betting on value or small stocks. This result holds both in the overall sample as well as in the more recent time period since 2005. Because the global earnings quality portfolio has a negative correlation with a value portfolio, an investor wishing to invest in both exposures can achieve significant diversification benefits.

Original paper – Download PDF

Here you can download the PDF and original paper of Global Return Premiums on Earnings Quality, Value, and Size.

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Author

Max Kozlov
BlackRock

Antti Petajisto
Brooklyn Investment Group; New York University (NYU) – Department of Finance; Yale School of Management

Conclusion

In conclusion, the study “Global Return Premiums on Earnings Quality, Value, and Size” by Max Kozlov and Antti Petajisto reveals that a simple investment strategy focusing on high earnings quality stocks and shorting low earnings quality stocks can generate a higher Sharpe ratio compared to the overall market or strategies targeting value or small stocks.

The dataset, encompassing all developed markets between July 1988 and June 2012, supports these findings both in the entire sample as well as since 2005. A notable outcome demonstrates that the global earnings quality portfolio is negatively correlated with a value portfolio, offering investors the opportunity to achieve significant diversification benefits by investing in both exposures.

These insights on global return premiums and portfolio diversification can provide valuable guidance for investors in enhancing their investment strategies and performance.

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FAQ

Q1: What is the main focus of the research paper “Global Return Premiums on Earnings Quality, Value, and Size,” and what key findings does it present regarding investment strategies?

The research paper investigates the return premium on stocks with high earnings quality using a global dataset covering developed markets from July 1988 to June 2012. It reveals that a simple investment strategy, going long on stocks with high earnings quality and shorting stocks with low earnings quality, generates a higher Sharpe ratio compared to the overall market or similar strategies focused on value or small stocks. This result holds true for both the overall sample and the more recent period since 2005.

Q2: How does the paper highlight the diversification benefits of investing in both global earnings quality and value portfolios?

The study identifies a negative correlation between the global earnings quality portfolio and a value portfolio. Investors seeking exposure to both earnings quality and value can achieve significant diversification benefits. The paper suggests that due to this negative correlation, combining these exposures enhances investment performance.

Q3: What is the significance of the dataset used in the study, and how does it contribute to the paper’s findings?

The dataset used in the study covers all developed markets from July 1988 to June 2012. This comprehensive and recent global dataset supports the findings of the research, indicating that the superior Sharpe ratio of the strategy focusing on high earnings quality stocks persists both in the overall sample and in the more recent time period since 2005. The dataset enhances the robustness and applicability of the study’s conclusions.

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