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Anatomy of recent value premium's travails

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  • Yin, Libo
  • Liao, Huiyi

Abstract

The recent underperformance of the value effect has prompted investors to question whether the value effect has lost its potency. In the Chinese A-share market where the value effect has vanished like in the U.S. market, there is a negative relationship between value and composite profitability, a metric comprising profitability levels and earnings growth. This steadily intensifying relationship, coupled with the positive and stable composite profitability premium, causes the weakening effect of composite profitability on the value premium to grow more pronounced over time. This substantial dampening effect, the primary driver of the time variations of the value premium, is precisely why the value premium, although impressive in its early stages, remains ineffective over the nearly two decades of the entire sample period. When the interference of composite profitability is removed, the value effect experiences a significant resurgence, boosting returns to an astonishing 1.97% per month.

Suggested Citation

  • Yin, Libo & Liao, Huiyi, 2024. "Anatomy of recent value premium's travails," International Review of Financial Analysis, Elsevier, vol. 94(C).
    • Handle: RePEc:eee:finana:v:94:y:2024:i:c:s1057521924002576
    DOI: 10.1016/j.irfa.2024.103325
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