Cliff Asness (AQR) – New Paper Indicates Deep Value Trading Strategies Generate Excess Returns Not Explained By Traditional Risk Factors

Johnny HopkinsCliff AsnessLeave a Comment

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Late last month Cliff Asness and his team at AQR released a paper titled – Deep Value. In summary, the research indicates that deep value trading strategies generate excess returns not explained by traditional risk factors. Here’s a summary from the paper:

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.

You can read the full paper here.

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