Value investing versus other investment strategies

What is it about?

Motivated by the incessant demand for portfolio diversification, this study examines the connectedness between value and diverse types of stocks (growth, momentum, ESG, high beta, classic S&P 500, volatility). The applied methodology encompasses the time-varying parameter vector autoregressive (TVP-VAR) extension of the Diebold and Yilmaz (2012) framework for the period from 03/31/2011 to 03/31/2021. Results show moderate volatility transmissions among the sampled assets, which tend to escalate during periods of turmoil, such as the European Sovereign Debt Crisis, the plunge in oil prices and the COVID-19 outbreak. Growth and ESG stocks play an indispensable part in the transmission mechanism. Moreover, we investigate the hedging ability of value stocks within a portfolio containing other stocks, by estimating hedge ratios and optimal weights with the usage of conditional variance estimates (DCC-GARCH). The empirical findings reveal that value stocks can adequately hedge against the risk deriving from the volatility of the remaining investment instruments, especially in the case of high beta and volatility stocks. Thus, this analysis provides portfolio managers and investors with valuable insights in order for them to hedge their stock portfolios effectively.

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Why is it important?

The contribution of our study lies in the following aspects. First, to the best of the authors’ knowledge, this is the first attempt to examine the connectedness between value and diverse types of shares. The motivation behind our research lies in the increasing demand for value stocks that the U.S. stock market has witnessed in recent years and the possibility that they could be proven a “holy grail” at the investors’ disposal towards an efficient portfolio diversification, beyond gold (Akhtaruzzaman et al., 2021), precious metals (Lucey and Li, 2015), oil (Ciner et al., 2013), commodities (Bouri et al., 2020) and bitcoin (Shahzad et al., 2019). Second, we contribute to the literature by providing investors and market participants with explicit strategic schemes in order to achieve portfolio risk-minimization by using value stocks as hedging instruments.

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