The Importance of Being Value

Abstract

Value stocks are considered an equity class with distinctive price performance. They are believed to outperform the market, with a particular price volatility. How to explain this market phenomenon? New light can be shed on the debate by reconsidering the definition commonly used to recognize value stocks. When the definition is decomposed along a time axis into a structural component and a transitory component, both components help to explain price volatilities across stocks, but only one of them—the transitory component—gives rise to systematic outperformance.