Value Stocks beat Growth Stocks: An empirical Analysis for the German Stock Market

Table of Contents

1. Introduction

1.1. Motivation

1.2. Structure and objective

2. Conceptual definitions

2.1. Value investing

2.2. Growth investing

2.3. Links between value and growth investing

3. Asset pricing theories

3.1. Capital Asset Pricing Model

3.1.1. Risk-free interest rate

3.1.2. Market risk premium

3.1.3. Beta factor

3.1.4. Criticism and extensions

3.2. Fama and French three factor model

3.3. Explanation approaches for the value premium

3.4. Carhart four factor model

4. Determinants of expected stock returns

4.1. Price-to-book

4.2. Price-to-earnings

4.3. Dividend yield

4.4. Size

4.5. Momentum

4.6. Further determinants

5. Empirical studies for the German market

6. Own empirical analysis

6.1. Data and methodology

6.2. Descriptive statistics

6.3. Seasonality

6.4. Univariate and multivariate regressions

7. Conclusion

Objectives and Scope

This master's thesis conducts an empirical analysis of German stock market returns between 1992 and 2011 to evaluate the efficacy of various investment strategies, specifically focusing on value and growth factors, size, and momentum, while utilizing a monthly rebalancing approach.

• Investigation of the value premium in the German stock market.
• Evaluation of the size factor and the potential reversal of the size premium.
• Analysis of the technical momentum factor and its impact on excess returns.
• Examination of seasonal patterns in hedge portfolio returns.
• Comparison of explanatory power between standard asset pricing models and multifactor models.

Excerpt from the Book

Summary of Chapters

1. Introduction: Presents the motivation for comparing value and growth strategies and outlines the study's objective to examine these on the German market.

2. Conceptual definitions: Defines core investment styles and discusses the challenges of categorizing companies as either value or growth.

3. Asset pricing theories: Reviews theoretical frameworks including CAPM, the Fama-French three-factor model, and the Carhart four-factor extension.

4. Determinants of expected stock returns: Details specific firm characteristics—P/B, P/E, dividend yield, size, and momentum—that influence stock return predictions.

5. Empirical studies for the German market: Summarizes existing academic research regarding return factors and anomalies within the German stock market.

6. Own empirical analysis: Describes the dataset, methodology for portfolio formation, descriptive statistics, seasonal analysis, and regression models.

7. Conclusion: Summarizes findings, confirming a value premium and momentum impact while noting the reversal of the size effect in the German market.

Keywords

Value Investing, Growth Investing, Asset Pricing, Capital Asset Pricing Model, Fama-French Three-Factor Model, Carhart Four-Factor Model, German Stock Market, Price-to-Book, Price-to-Earnings, Dividend Yield, Size Premium, Momentum, Hedge Portfolio, Empirical Analysis, Seasonality.

Frequently Asked Questions

What is the primary focus of this thesis?

The thesis focuses on analyzing value versus growth investing strategies in the German stock market using empirical data from 1992 to 2011.

What are the central themes discussed in the work?

The work explores asset pricing theories, the efficacy of fundamental and technical firm characteristics in predicting returns, and market anomalies like the value premium.

What is the main objective of the empirical research?

The goal is to determine if hedge portfolios based on P/B, P/E, dividend yield, size, and momentum generate significant excess returns for German stocks.

Which scientific methodology is applied?

The study applies time-series regression analysis and constructs hedge portfolios rebalanced on a monthly basis to test various asset pricing models.

What does the empirical analysis cover?

It covers data collection from Thomson Datastream, descriptive statistics, examination of seasonal patterns, and both univariate and multivariate regressions of various factor models.

Which keywords best characterize this research?

Key terms include Value Investing, Momentum, Asset Pricing, German Stock Market, and the Fama-French and Carhart factor models.

How does the author define the value premium?

The author defines it as the phenomenon where value stocks (characterized by low valuation ratios) outperform growth stocks on average over time.

What is the significance of the "free of survivorship-bias" approach?

By including firms that went bankrupt, the author avoids an upward bias in performance returns, ensuring the results are more reflective of real-world market outcomes.

What were the findings regarding the size effect in Germany?

The analysis found that the size effect in the German market during the period 1992-2011 was negative, though statistically insignificant.