DP12685 Deep Value

Author(s): Clifford S. Asness, John M. Liew, Lasse Heje Pedersen, Ashwin K Thapar
Publication Date: February 2018
Keyword(s): arbitrage, behavioral finance, bubbles, demand pressure, Market Efficiency, noise, over-reaction, value investing
JEL(s): G02, G11, G12, G14, G15
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12685

We define "deep value" as episodes where the valuation spread between cheap and expensive securities is wide relative to its history. Examining deep value across global individual equities, equity index futures, currencies, and global bonds provides new evidence on competing theories for the value premium. Following these episodes, the value strategy has (1) high average returns; (2) low market betas, but high betas to a global value factor; (3) deteriorating fundamentals; (4) negative news sentiment; (5) selling pressure; (6) increased limits to arbitrage; and (7) increased arbitrage activity. Lastly, we find that deep value episodes tend to cluster and a deep value trading strategy generates excess returns not explained by traditional risk factors.