Historically, value and momentum factors have provided abnormal returns, however, during the recent decade a significant value drawdown has been noted. This paper analyzes the contemporary performance of value, momentum and their combination strategy using a comprehensive dataset covering monthly returns on eight markets and asset classes between February 1972 to January 2021. We find significant momentum alphas in the U.S., U.K. and continental European stock markets and demonstrate that combining value and momentum in a single portfolio results in significant positive alpha and higher Sharpe ratio than either strategy alone. While momentum is thriving, the value leg of the portfolio has seen a steep decline in performance and generated significant negative alpha during the most recent decade. Similarly, we document a downturn in the combo portfolio returns and Sharpe ratios across all markets and asset classes during the past decade. Curious about the recent downturn, we investigate the relationship between portfolio returns and the current low-interest rate environment. In accordance with the duration hypothesis, we observe a significant positive relationship between value factor portfolio returns and long-term interest rate levels across equity markets. We cannot establish any statistical relationship between interest rates and momentum and find only weak evidence for such a relationship for combo. Thus, our results suggest that the negative correlation between value and momentum is not driven by opposite exposure to interest rate risk. In the light of our results, we find it doubtful that current low-interest rate environment could fully explain the considerable value drawdown.
|Educations||MSc in Advanced Economics and Finance, (Graduate Programme) Final Thesis|
|Number of pages||109|
|Supervisors||Francesco Di Lorenzo|