59 Pages Posted: 28 Nov 2017 Last revised: 12 Dec 2017

AQR Capital Management, LLC; Copenhagen Business School - Department of Finance; New York University (NYU); Centre for Economic Policy Research (CEPR)

See all articles by Clifford S. Asness

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Date Written: December 1, 2017

Abstract

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.