The Value Spread as a Market Timing Signal: Evidence from Asia

Abstract

Using monthly data from 1992 to 2006, we show that the value premium in Asia ex Japan is positively related to the cross-sectional dispersion of four common value ratios. The book-toprice and cash flow-to-price spreads exhibit the strongest relationship. Typical month-to-month variation in these two value spreads is often associated with a 0.4%-1.0% per annum change in the value premium. Short-side positions are typically solely responsible for the positive relationship, particularly in recent years. Our results provide out of sample support for previous findings for the US market, but cast doubt on whether mean reversion alone can explain the observed value premium-spread relationship.

Keywords: Value Spread, value premium, market timing, Asia

JEL Classification: 00