Value, Momentum and Market Timing

Finance

Speaker:Ilias Filippou, Warwick Business School
Date: Friday 6 March 2015
Time: 14:00
Location: Building One: Constantine Leventis

Further details

We look at the performance of value and momentum portfolios conditional on firm-characteristics that a manager would employ as signalling tools in order to time the market (i.e. repurchases and issues). We find that two factors; a “market” factor that buys stocks of firms that do not make repurchases and issues and a mispricing factor that goes long stocks with high relative repurchase prices and short low relative issue prices are able to capture the cross-sectional variation of the strategies of interest. Intuitively, investors require a risk premium for investing in value and momentum strategies so as to protect themselves from periods of adverse market-timing. Specifically, loser (undervalued) portfolios provide a premium when market timing succeeds while winner (overvalued) portfolios provide a hedge under bad states of the world when market timing fails.