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Conditional Style Rotation Model on Enhanced Value and Growth Portfolios: The European Experience

Academic and professional attention has been devoted in the past to the analysis of the potential value-enhancement generated by strategies based on macroeconomic models and applied to portfolios or indexes of style classes. In this paper, we analyse the extent of the excess returns that can be potentially generated by rotating a portfolio between value and growth stocks in the European markets. We extend the results obtained by Bird and Casavecchia (Bird, R. and Casavecchia. L. (2007) Sentiment and financial health indicators for value and growth stocks: the European experience, European Journal of Finance, 13, pp. 769-793) when applying market sentiment and financial health indicators to stocks and document the extent to which macroeconomic factors convey information that is not already impounded in these indicators. We find that a strategy to rotate between portfolios, constructed on either single valuation metrics or their enhancement by market sentiment and a company’s financial strength, is typically consistent, monotonic, and in the expected direction. This highlights the proposition that the macroeconomic factors capture a cross-sectional variation that is not typically impounded in unconditional regression models on value and growth portfolios.

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Paper provided by The Paul Woolley Centre for Capital Market Dysfunctionality, University of Technology, Sydney in its series Working Paper Series with number 2.

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Length: 24 pages
Date of creation: 01 May 2008
Date of revision:
Handle: RePEc:uts:pwcwps:2
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  1. John Y. Campbell & Robert J. Shiller, 1988. "Stock Prices, Earnings and Expected Dividends," NBER Working Papers 2511, National Bureau of Economic Research, Inc.
  2. Elton, Edwin J & Gruber, Martin J & Blake, Christopher R, 1995. " Fundamental Economic Variables, Expected Returns, and Bond Fund Performance," Journal of Finance, American Finance Association, vol. 50(4), pages 1229-56, September.
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  5. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November.
  6. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, vol. 22(1), pages 3-25, October.
  7. Ferson, Wayne E & Harvey, Campbell R, 1991. "The Variation of Economic Risk Premiums," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 385-415, April.
  8. Charles M.C. Lee & Bhaskaran Swaminathan, 2000. "Price Momentum and Trading Volume," Journal of Finance, American Finance Association, vol. 55(5), pages 2017-2069, October.
  9. Ron Bird & Lorenzo Casavecchia, 2007. "Sentiment and Financial Health Indicators for Value and Growth Stocks: The European Experience," The European Journal of Finance, Taylor & Francis Journals, vol. 13(8), pages 769-793.
  10. Biorn,E., 2001. "How is generalized least squares related to within and between estimators in unbalanced panel data?," Memorandum 06/2001, Oslo University, Department of Economics.
  11. Fama, Eugene F. & Gibbons, Michael R., 1984. "A comparison of inflation forecasts," Journal of Monetary Economics, Elsevier, vol. 13(3), pages 327-348, May.
  12. Fama, Eugene F & French, Kenneth R, 1996. " Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
  13. Conrad, Jennifer & Kaul, Gautam, 1993. " Long-Term Market Overreaction or Biases in Computed Returns?," Journal of Finance, American Finance Association, vol. 48(1), pages 39-63, March.
  14. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
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