VALUE-GROWTH STRATEGIES AND THE ROLE OF MACROECONOMIC RISKS: AN INTERNATIONAL STUDY

Abstract

The debate on the underlying reason for the international value premium is still on-going. Supporters of the rational asset pricing theory propose that value premiums are due to higher risk-bearing by value investors. On the other hand, supporters of behavioural finance argue that investors are able to earn abnormal returns through value-growth strategies because they can identify the undervalued value stocks and overvalued growth stocks. Using data from 18 markets across three regions, we confirm the profitability of long-term value-growth strategies internationally. We investigate if the international value premium can be explained by possible sources of local macroeconomic risks and also test whether returns to value-growth strategies are linked to future economic growth. Our results suggest that macroeconomic variables typically considered important in asset pricing studies are unable to explain the value premium on a global basis. Further, value-growth returns are generally not informative about future Gross Domestic Product (GDP) growth.