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When Growth Beats Value: Removing Tail Risk From Global Equity Momentum Strategies

Author

Listed:
  • Andrew Clare
  • James Seaton
  • Peter N. Smith
  • Stephen Thomas

Abstract

We investigate the relationship between value, growth and momentum investment styles across a wide range of developed and emerging economy equity markets. As would be anticipated, value investing generally beats growth. We then determine whether the application of relative momentum or trend following filters can enhance the risk-adjusted performance for either value or growth investors. We find that both value and growth portfolios benefit from momentum filters but particularly the latter, though the application of such a filter still leaves investors with return volatility that is typical of equity markets along with negative skewness and with high maximum drawdowns. However, our results show that the use of a simple trend following filter typically delivers a much more favourable investment performance than relative momentum with considerably lower volatility and smaller drawdowns. Furthermore, the application of a simple trend following filter either on its own or in combination with a relative momentum filter, not only reduces the performance advantage of value over growth investing but actually reverses this advantage.

Suggested Citation

  • Andrew Clare & James Seaton & Peter N. Smith & Stephen Thomas, 2014. "When Growth Beats Value: Removing Tail Risk From Global Equity Momentum Strategies," Discussion Papers 14/09, Department of Economics, University of York.
  • Handle: RePEc:yor:yorken:14/09
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    References listed on IDEAS

    as
    1. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W, 1994. " Contrarian Investment, Extrapolation, and Risk," Journal of Finance, American Finance Association, vol. 49(5), pages 1541-1578, December.
    3. Eugene F. Fama & Kenneth R. French, 1998. "Value versus Growth: The International Evidence," Journal of Finance, American Finance Association, vol. 53(6), pages 1975-1999, December.
    4. repec:eee:beexfi:v:9:y:2016:i:c:p:63-80 is not listed on IDEAS
    5. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    6. Clare, Andrew & Seaton, James & Smith, Peter N. & Thomas, Stephen, 2016. "The trend is our friend: Risk parity, momentum and trend following in global asset allocation," Journal of Behavioral and Experimental Finance, Elsevier, vol. 9(C), pages 63-80.
    7. Jacob Boudoukh & Roni Michaely & Matthew Richardson & Michael R. Roberts, 2007. "On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing," Journal of Finance, American Finance Association, vol. 62(2), pages 877-915, April.
    8. Clifford S. Asness & Tobias J. Moskowitz & Lasse Heje Pedersen, 2013. "Value and Momentum Everywhere," Journal of Finance, American Finance Association, vol. 68(3), pages 929-985, June.
    9. Wang, Kevin Q., 2005. "Multifactor Evaluation of Style Rotation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(02), pages 349-372, June.
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    11. Moskowitz, Tobias J. & Ooi, Yao Hua & Pedersen, Lasse Heje, 2012. "Time series momentum," Journal of Financial Economics, Elsevier, vol. 104(2), pages 228-250.
    12. Kent Daniel & Ravi Jagannathan & Soohun Kim, 2012. "Tail Risk in Momentum Strategy Returns," NBER Working Papers 18169, National Bureau of Economic Research, Inc.
    13. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
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    More about this item

    Keywords

    International equity; Value investing; Growth investing; Relative momentum; Trend following; Tail risk;

    JEL classification:

    • G0 - Financial Economics - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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