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Value, Momentum and Volatility

In: Business and Management

Submitted By lubi
Words 4237
Pages 17
Empirical Finance
Value, Momentum, and Volatility

ABSTRACT
In this paper we approach two major topics on the central debate of asset pricing theory: the returns to value and momentum strategies and also, the comparison of volatility models. Our analysis is divided in two parts: in the first, we provide a monthly view on 115 stocks from the S&P 500 index for the past twenty four years and the respective return premia resulting from value and momentum strategies. In the latter part, the main goal is to test different volatility models by analyzing historical data from Microsoft stocks. Therefore, we follow the structure of Asness et al. (2013) while analyzing value and momentum, and used the methodology of several authors to define and calibrate the data. Our results are in line with the literature since we detected return premium for value and also for momentum. Nevertheless, not all of the conclusions of the literature are confirmed in our analysis, as we will demonstrate. On the second section, ARCH (5), GARCH (1,1) and Taylor/Schwert GARCH(1,1) models are tested revealing the supremacy of the latter.

Key words: Market efficiency, Value, Momentum, ARCH, GARCH, Taylor/Schwert, Volatility Models.

1. Introduction
Our research is mainly related with the recent literature published on global asset pricing. We have followed Asness et al. (2013) where the authors present evidence of value and momentum return premia across eight different asset classes and markets. Moreover, Fama and French (2012) examine the returns to size, value, and momentum in individual stocks.
The main characteristic of financial assets is the return, which is typically considered to be a random variable. Some authors found patterns in average stock returns related to B/M, size, earnings price ratio, cash flow price and historical sales growth (Banz (1981), Basu (1983), Rosenberg, Reid,...

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