The Long-Run and International Evidence on the Value Premium
The term "Value Premium" refers to the empirical observation that firms with low price multiples (i.e Price/Book, Price/Earnings, Price/Cash Flow) have tended to have higher returns than their high-multiple counterparts - even after controlling for risk. People give a lot of possible reasons for this - we have a bad model for controlling for risk, there are behavioral biases, or it's simply a case of data diving. I just came across a paper by a group known as the Brandeis Institute titled "Value vs. Glamour: A Global Phenomenon" that seems to rule out the data diving story. They examine the evidence for the value premium both across time (the mid 1960's to the present) and internationally. They found that While the degree of outperformance of value stocks vs. glamour stocks varied across data sets, what strikes us as most significant was the consistency the value premium exhibited: across valuation metrics, such as price-to-book, price-to-cash flow, price...