Predictability of Value Premiums in The Tehran Stock Exchange: Evidence Based on Prior Returns of Value and Glamour Stocks

Authors

Faculty of Administrative Science and Economics, University of Isfahan, Isfahan, Iran.

Abstract

This paper Investigates whether the prior returns of value and glamour stocks can predict future value premiums using stocks listed on the Tehran Stock Exchange. In the spirit of Eleswarapu and Reinganum (2004), we focus on exclusive predictive power of prior returns of style portfolios. We form three sets of value and glamour portfolios based on three different definitions. While we find that value premiums are predictable in both in-sample and out-of-sample tests, this evidence is not the same using prior returns of each style. Glamour stock returns positively predict future value premiums while value stock returns predict them with a negative coefficient. Thus, we show that the prior underperformance of current value stocks can be a good candidate for predicting value premiums. We also show that this evidence of predictability can be exploited in the form of a style rotation strategy and can beat the buy-and-hold strategy as well as the usual value investing strategies.

Keywords

Iranian Economic Review

Articles in Press, Accepted Manuscript
Available Online from 27 November 2022

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