A Case Study for Using Value and Momentum at the Asset Class Level

Abstract

This article explores a globally diversified asset allocation strategy driven by value and momentum factors. The authors find that adjusting for value and momentum yields higher and better quality returns that are statistically and economically significant. This research differs from the existing literature in that it examines the value and momentum effects at the asset class level and uses a long-only approach. The research employs simple nonoptimized metrics for value and momentum, which reduce the chances that the authors’ results are attributable to data mining. The authors find that dynamic asset allocation based on simple valuation and momentum metrics would have added roughly 266 basis points of excess annualized return over the sample period 1975–2013.

TOPICS: Analysis of individual factors/risk premia, simulations