We found a match
Your institution may have access to this item. Find your institution then sign in to continue.
- Title
A Fair Value Approach to Forecasting Value versus Growth Returns.
- Authors
Lepigina, Olga; DiCiurcio, Kevin J.; Kresnak, Ian
- Abstract
Relative performance of value with respect to growth has been a subject of industry debate for many years and is a cornerstone of numerous equity allocation decisions. This article presents a framework for quantifying the extent of over or undervaluation of value relative to growth and for identifying the key factors driving performance. The authors construct a fair value measure of the value factor to growth factor price-to-book ratio using prior-period ratio of price/book, 10-year trailing inflation, 10-year real Treasury yield, equity volatility, and growth of corporate profits in a vector error-correction model (VECM). This is then extended to a robust forecasting model for future value and growth returns. Upon conducting an out-of-sample value versus growth historical return forecast, the authors conclude that this method is a significant improvement over the use of historical average as a future return estimation. This methodology offers an alternative robust solution to forecasting value versus growth returns that can be further applied to asset allocation decisions and risk management.
- Publication
Journal of Portfolio Management, 2023, Vol 49, Issue 2, p162
- ISSN
0095-4918
- Publication type
Academic Journal
- DOI
10.3905/jpm.2022.49.2.162