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Deep Value

Author

Listed:
  • Pedersen, Lasse Heje
  • Asness, Clifford S.
  • Liew, John M.
  • Thapar, Ashwin K

Abstract

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.

Suggested Citation

  • Pedersen, Lasse Heje & Asness, Clifford S. & Liew, John M. & Thapar, Ashwin K, 2018. "Deep Value," CEPR Discussion Papers 12685, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12685
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    References listed on IDEAS

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    More about this item

    Keywords

    Value investing; Market efficiency; Bubbles; Behavioral finance; Over-reaction; Demand pressure; Arbitrage; Noise;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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