Title
The duality of value and mean reversion
Document Type
Article
Date of Original Version
1-1-2016
Abstract
This chapter examines how the value and long-term return reversal or “mean reversion�? strategies are related and what makes them different. Comparing risk-return characteristics in backtests, the authors find that the performance of the value strategy dominates the performance of a mean-reverting strategy. They further establish that relative price-to-book-value (P/B) ratios are strong predictors of mean reversion; thus, they conclude, selling high P/B stocks and buying low P/B stocks is a sound rule for rebalancing a value portfolio. The authors also demonstrate that, unlike security prices, company fundamentals are not mean-reverting. By controlling for objective information about company fundamentals, P/B ratios help distill the mean-reverting component of stock prices reflecting only transitory effects of investors’ trades. The authors infer that the value strategy gains a performance advantage over the mean reversion strategy because it is attuned to a purer signal.
Publication Title, e.g., Journal
Portfolio Construction, Measurement, and Efficiency: Essays in Honor of Jack Treynor
Citation/Publisher Attribution
Beck, Noah, Shingo Goto, Jason Hsu, and Vitali Kalesnik. "The duality of value and mean reversion." Portfolio Construction, Measurement, and Efficiency: Essays in Honor of Jack Treynor (2016): 229-238. doi: 10.1007/978-3-319-33976-4_9.