Value and Momentum from Investors’ Perspective: Evidence from Professionals’ Risk-Ratings

Christoph Merkle, Christoph Sextroh

Research output: Working paperOther research output

Abstract

We conduct a controlled experiment with financial analysts and professionals toprovide more direct evidence on whether value and momentum reflect risk factorsor mispricing. Eliciting professionals’ risk perceptions and return expectations forcompany stocks in a controlled experiment allows us to identify what constitutesa risky investment from the point of investors. Contrary to the risk factor hypoth-esis, value and momentum stocks are not regarded as more risky. Supporting thevalidity of the analysis, other factors such as size and beta fall in line with the tra-ditional interpretation as risk factors. At the same time, we observe higher returnexpectations for momentum stocks, which is consistent with empirical findings butagain inconsistent with analysts believing in a risk-return trade-off.
Original languageEnglish
Publication statusUnpublished - Oct 2017

Fingerprint

Rating
Investors
Momentum
Risk factors
Experiment
Risk-return trade-off
Risk perception
Analysts
Risk-return
Risky investment
Mispricing
Factors
Financial analysts

Keywords

  • value
  • momentum
  • risk factor
  • anomaly
  • financial analysts
  • investors

Cite this

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Value and Momentum from Investors’ Perspective: Evidence from Professionals’ Risk-Ratings. / Merkle, Christoph; Sextroh, Christoph.

2017.

Research output: Working paperOther research output

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AB - We conduct a controlled experiment with financial analysts and professionals toprovide more direct evidence on whether value and momentum reflect risk factorsor mispricing. Eliciting professionals’ risk perceptions and return expectations forcompany stocks in a controlled experiment allows us to identify what constitutesa risky investment from the point of investors. Contrary to the risk factor hypoth-esis, value and momentum stocks are not regarded as more risky. Supporting thevalidity of the analysis, other factors such as size and beta fall in line with the tra-ditional interpretation as risk factors. At the same time, we observe higher returnexpectations for momentum stocks, which is consistent with empirical findings butagain inconsistent with analysts believing in a risk-return trade-off.

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