Uncovering the Price of Growth and Value

Despite a long-term endeavor by academia and the financial industry to explain the growth and value investment strategies, this topic has generated more questions than answers. For instance, the 2007 performance switch between these two strategies led to monetary losses in multiple funds and sparked a fresh round of academic studies. The diversity of the existing models suggests that the growth and value stock performances are determined by a dynamic composition of multiple related effects. Exploring the returns with prevailing monolithic approaches, however, leads to averaging out the main effects and their interrelations, consequently lowering the explanatory power of regressions and leading to a wide range of loose interpretations. Therefore, this project proposes to complement these coarse-grain cross-sectional multivariate regressions and composite variables with a finer-grained explanatory gain decomposition approach for identifying and disentangling the dominant sources of the growth and value premiums. Furthermore, the results shed light on the redundancy of the HML factor by explaining it as a sampling of stocks based on their quality characteristics. Overall, the study outlines the direction towards the next decomposition target: uncovering the dominant mispricing effects