First, they form zero-cost portfolios for value (Price-to-book) and momentum (past returns) by finding the return of the top third ranking minus the bottom third ranking portfolios; then they form a portfolio that attributes 50% of the return of the zero-cost value portfolio and 50% of the return of the zero-cost momentum portfolio.
They first analyze this combined portfolio by looking at different observation and holding periods (i.e., 1 -12 months for each). They find that in all observation and holding periods, the combined zero-cost portfolio has positive average returns. The 1 month holding period seems to have the highest returns; however, longer holding periods tend to have less volatility resulting in higher sharpe ratios and alphas. The 1-month and 12-month holding periods seem to have less significant t-statistics than the 3-month to 9-month holding periods.
Next, the authors broke down the returns into subperiods and split the combined portfolio into its momentum and value components. They find that the combined portfolio tends to perform best in late-stage bull markets. They also find that the momentum portfolio performs well in all subperiods; whereas, the value portfolio has ups and downs. Finally, they find a correlation between the value and momentum portfolio of -0.22, signally great diversification ability by combining the two characteristics.
Next, the authors look at the performance of the value and momentum portfolios at different holding periods. They find that the value portfolio continues to increase in performance through about 2 years, then levels off. The momentum portfolio increases in performance through the first year, then decreases to 0% by the end of the third year.
Next, the authors sort the value and momentum portfolio thirds into 9 portfolios (i.e., past winners - value, past winners - growth, past losers - value, past losers - growth, and so on). They find in all cases that combining the top winners with value outperforms past losers with growth monotonically.
Finally, the authors explore holding the value/past winner portfolio versus holding the growth/past loser over a five year period. The return of holding the value/winner portfolio exceeds the growth/loser portfolio by about 1.5% for up to 2 years; then this excess return steadily decreases until the difference in return is about 0.3% by year 5.
Lobão, J., & Azeredo, M. (2018). Momentum meets value investing in a small European market. Portuguese Economic Journal, 17(1), 45–58.
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