1. Behavioral Finance LSV March 31, 2015 Behavioral Finance Economics 437

2. Behavioral Finance LSV Lakonishov, Shleifer, Vishny, 1994 Questions: Do value stocks really beat out growth stocks (the F-F issue revisited)? Are value stocks actually riskier Is there a reason that value stocks do better? Answers: Yes, by 10 – 11 percent annually No, they outperform is all periods Yes, future earnings of value stocks are better than predictions – opposite for growth stocks

3. Behavioral Finance LSV Haugen-Baker, 1996 Great summary of the literature A Grand Synthesis Use multi-factor model to create a “generalized” value portfolio Incorporate J-T effects 20 percent outperformance for H-B synthesis Data used from five countries: France, Germany, Japan, UK, US

4. Behavioral Finance LSV Hanna-Ready, 2005 Dispute H-B results due to monthly turnover (40 percent) in HB rebalancing (causes high transaction costs) Conclude that six month rebalancing of F-F portfolios is best Most of H-B results come from J-T. J-T results fall if transaction costs considered Cannot explain why F-F does so well

5. Behavioral Finance LSV Steve Ross (MIT) Creator of “Arbitrage Pricing Theory” Now researching “can you predict ‘expected returns’ from stock prices Will be here on April 17 th, 2015 Great lecturer – you should attend!!

6. Behavioral Finance LSV Definition of absence of LSV Let p t-1, p t-2, p t-3, etc. be a series of past prices Now, think about, p t E[ p t | info, p t-1, p t-2, p t-3, etc.] = E[ p t | info] Then, no LSV

7. Behavioral Finance LSV Chordia & Shivakumar, 2006 Is it “earnings” LSV or “price” LSV Page 655: “Our results support the argument that price LSV is primarily subsumed by the systematic component of earnings LSV and that price LSV is merely a manifestation of the earnings LSV.”

8. Behavioral Finance LSV Chan, Jegadeesh, Lakonishok 1996 Is it earnings? Is it price? They 7.7 percent six month gap between winner portfolios and loser portfolios using price momentum. Conclusion (page 1709): “ In general, the price momentum effect tends to be stronger and longer-lived than the earnings momentum effect.”

9. Behavioral Finance LSV Leippold & Lohre, 2010 Look at non-US data Find price earnings LSV Agree generally with Chordia-Shivakumar But,”we provide additional evidence that international LSV strategies appear to be mostly limited to highly illiquid stocks.”

10. Behavioral Finance LSV Sadka, 2005 “Role of Liquidity Risk” Conclusion: “the results suggest that a substantial part of LSV and PEAD (post-earnings-announcement drift) returns can be viewed as compensation of the unexpected variations in the aggregate ratio of informed traders to noise traders.” “Unexpected systematic variations of (the variable component of) liquidity are shown to be priced within the context of LSV and PEAD

11. Behavioral Finance LSV The End