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The Journal of Portfolio Management

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Deep Value

Cliff Asness, John Liew, Lasse Heje Pedersen and Ashwin Thapar
The Journal of Portfolio Management Multi-Asset Special Issue 2021, jpm.2021.1.215; DOI: https://doi.org/10.3905/jpm.2021.1.215
Cliff Asness
is a managing and founding principal at AQR Capital Management in Greenwich, CT
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John Liew
is a founding principal at AQR Capital Management in Greenwich, CT
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Lasse Heje Pedersen
is a principal at AQR Capital Management in Greenwich, CT, and a professor at Copenhagen Business School in Copenhagen, Denmark
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Ashwin Thapar
is a principal at AQR Capital Management in Greenwich, CT
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Abstract

The authors define deep value as episodes in which the valuation spread between cheap and expensive securities is especially wide relative to its history. Examining global individual equities, equity index futures, currencies, and global bonds, the authors find that deep value is (1) highly compensated; (2) related to worsening fundamentals; (3) associated with higher risk but not fully explained by known risk factors; and (4) characterized by selling pressure related to overextrapolation of past returns and, although arbitrageurs take the other side, they face elevated trading costs and risk. These findings support a theory of return extrapolation driving the value risk premium over other behavioral and rational explanations.

Key Findings

  • ▪ The evolution of asset returns and fundamentals around deep value episodes—defined as periods with an especially wide valuation spread between cheap and expensive securities—offers a new window to understand markets and differentiate competing theories of the value premium.

  • ▪ Deep value episodes have historically been characterized by poor past performance of value investing and high future returns to value investing.

  • ▪ During these episodes, value stocks experience worsening earnings fundamentals, negative sentiment in news stories, selling pressure, and higher limits to arbitrage; nevertheless, sophisticated arbitrageurs pursue these opportunities.

TOPICS: Global markets, portfolio construction, risk management, quantitative methods

  • © 2021 Pageant Media Ltd
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The Journal of Portfolio Management: 48 (8)
The Journal of Portfolio Management
Vol. 48, Issue 8
Emerging Markets 2022
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Deep Value
Cliff Asness, John Liew, Lasse Heje Pedersen, Ashwin Thapar
The Journal of Portfolio Management Feb 2021, jpm.2021.1.215; DOI: 10.3905/jpm.2021.1.215

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Deep Value
Cliff Asness, John Liew, Lasse Heje Pedersen, Ashwin Thapar
The Journal of Portfolio Management Feb 2021, jpm.2021.1.215; DOI: 10.3905/jpm.2021.1.215
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  • Article
    • Abstract
    • THEORY
    • DATA AND METHODOLOGY
    • THE RETURNS OF DEEP VALUE
    • THE ECONOMIC FUNDAMENTALS OF DEEP VALUE
    • THE RISK DYNAMICS OF DEEP VALUE INVESTING
    • CONCLUSION: DEEP VALUE—RISK, (ANTI-) BUBBLES, OR NOISE?
    • ACKNOWLEDGMENTS
    • ENDNOTES
    • REFERENCES
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