Identifying the role of expectation errors in value glamour return using Fscore

Abstract

Existing literature documents that a portfolio of value stocks outperforms a portfolio of glamour stocks and market portfolio. Researchers have different opinions regarding, “what derives premium returns from a long short value glamour strategy?” The central objective of this paper is to seek the source of value glamour return effect. We have mix results for various hypotheses tested. Our main findings are: European stocks have extremely negative performance for long short value glamour strategy during 1991 and 2011, second, Fscores effectively separate potential winners from potential losers, third, error in investor expectations partially affect the performance of value glamour strategy but central source of value glamour performance is the riskiness of value stocks in comparison to risk levels of overall market or glamour stocks and lastly, investor sentiments do amplify future returns providing partial evidence in favor of market mispricing. We conclude that successful value investing requires ability to pick quality stocks from within a broader portfolio and exposure to higher risk.