Equity Trading: The Trouble with Value

Abstract

Recently, liquidity-driven economic policies have mounted a challenge to time-series value investing. In this paper, we examine the risk-return performance of simple value indicators.We find that: 1) even though long term equity returns are partially predictable, directional value investing delivers mediocre results; 2) the "Central Bank put" is a fly in the ointment for value investors; 3) relative value has broadly outperformed absolute value. Lastly, we conjecture that the poor performance of directional value investing hides substantial overvaluations in U.S. equities.

Keywords: Value, Equity, Valuation, Cross-Section, Time-Series, Fed Policy, Overvaluation, Dividend Yield, PE, Tobin's Q