Value and Momentum Investing in the European Markets: Understanding if value and momentum strategies can be used in combination to increase excess return of an investment portfolio - Evidence from the STOXX Europe 600 Index

Jonas Kofoed Larsen

Student thesis: Master thesis


Through a cross sectional analysis of the 600 largest Pan-European equities over the period from Janu-ary 1999 through December 2014 the study finds that value investors have been rewarded, while mo-mentum investors have experienced insignificant returns, which favour the efficient market postulates. Further, it appears that a combined value and momentum portfolio remains superior and exhibits lower risk exposure. Consequently, an equal-weighted 50/50 portfolio of value and momentum stocks outper-forms on a risk-adjusted basis. The main explanation rests on the fact that value and momentum returns correlate negatively with each other, whereby the overall portfolio volatility is reduced. The findings are based on a holding period of six months, a monthly rebalancing frequency and an ap-proach that focuses on all equities in the STOXX Europe 600 index in the beginning of each year through-out the sample period. The equal-weighted value portfolio is constructed using the Fama and French methodology of buying the cheapest and selling the most expensive stocks measured by book-to-market ratio and using 30 pct. as breakpoint. The equal-weighted momentum portfolio is based on a ranking of the past 2-12 months, skipping the most recent month’s return, as it is standard in the momentum liter-ature to evade the common 1-month reversal effect. Moreover, the study stress test the findings through changing the weighting scheme and imposing sec-tor neutrality. When applying market value weights rather than an equal-weighted portfolio, the value-premium also becomes insignificant. Finally, the study evaluates the impact of applying an industry-neutral approach similar to Moskowitz and Grinblatt (1999), because the value portfolio exhibits a dis-tinct industry bias towards financials but underweight consumer services and the health care industry. Imposing sector neutrality confirms that an equal-weighted portfolio that combines value and momen-tum outperforms all other strategies on a risk-adjusted basis. Also, it gives no clear indication that the performance of a pure momentum or a pure value strategy is weakened when taking account for industry effects

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2015
Number of pages93