Abstract

We find consistent value and momentum return premia across eight diverse markets and asset classes, and a strong common factor structure among their returns. Value and momentum returns correlate more strongly across asset classes than passive exposures to the asset classes, but value and momentum are negatively correlated with each other, both within and across asset classes. Our results indicate the presence of common global risks that we characterize with a three-factor model. Global funding liquidity risk is a partial source of these patterns, which are identifiable only when examining value and momentum jointly across markets. Our findings present a challenge to existing behavioral, institutional, and rational asset pricing theories that largely focus on U.S. equities.

Scientific Portfolio AI- Generated Summary

The paper “Value and Momentum Everywhere” provides comprehensive evidence on the return premia to value and momentum strategies globally across asset classes and uncovers strong common factor structure among their returns. The study challenges existing behavioral, institutional, and rational asset pricing theories and presents new insights into global risks and market efficiency.

The authors construct value and momentum portfolios across markets and asset classes, including individual stocks, bonds, currencies, and commodities. They find that both value and momentum strategies generate significant positive returns in all asset classes and markets, with momentum being particularly strong in equities. The authors also uncover strong common factor structure among the returns of value and momentum strategies across diverse asset classes, which is difficult to reconcile under existing behavioral theories.

The study further investigates the source of common variation by examining macroeconomic and liquidity risk. The authors find that exposure to funding liquidity risk provides a partial explanation for the correlation structure among value and momentum strategies, especially following the funding crisis of 1998. However, the authors note that much remains to be explained, and matching the magnitude of their empirical findings remains an open question.

The authors offer an empirically motivated three-factor model to describe the cross-section of returns across asset classes. The model includes a global value factor, a global momentum factor, and a funding liquidity factor. The authors find that the model captures a significant portion of the variation in returns across asset classes and markets.

The study has important implications for investors and financial professionals. The authors argue that the consistent value and momentum return premia across diverse markets and asset classes provide opportunities for investors to improve their portfolio construction. However, the authors caution that gross returns overstate the profits earned by pursuing these strategies in practice, as transaction costs and capacity constraints can significantly reduce real-world returns.

In conclusion, the paper provides compelling evidence on the return premia to value and momentum strategies globally across asset classes and challenges existing theories of asset pricing. The study offers new insights into global risks and market efficiency and has important implications for investors and financial professionals.