Value Premium

Value Premium

Value assets are defined as those with a lower liquidating or intrinsic value as compared to their market value (O’Shaughnessy 1998:2) Value stocks are those with a higher book to market value and are thus riskier than growth stocks which have a high market value, although value stocks are expected to yield higher returns. Studies have demonstrated that a short term growth strategy has outperformed the market (Levis and Liodakis, 2001) although others contend that such outperformance is only the result of the higher risk factor and that growth stocks may actually outperform value-based stocks in the long run (Beneda 2002).
Where value stocks are concerned, the potential for returns exists in the future. therefore their book returns may be lower. However, in the case of stocks known as growth stocks where the book value is higher than the market value, the short term returns are higher but the beta value obtained through the Capital asset Pricing Model may not be higher than that for value stocks. The reason for this phenomenon is because the CAPM beta is a relative measure of stock value, which also factors in time. Therefore from this perspective, the growth stocks may provide more value in the short term, however from the long term point of view they may, in fact, reflect a losing trend because these are the firms that are viewed in the market as potential loss firms, and therefore have a lower value as compared to the riskier value stocks, which may however have enormous potential for high returns after some years.
Applying the CAPM Model, value investment styles outperform the market because they are riskier, a position that has been supported by Gulen and Vassalou (2001) who have linked variations in value&nbsp.premium occurring over time to variables such as the future Gross Domestic Product that reflect the macroeconomic risks in the market.

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