歐洲股票市場價值溢酬之研究：另類檢驗法

逢甲大學
金融博士學位學程
博士論文
歐洲股票市場價值溢酬之研究:
另類檢驗法
Value Premium in the European Stock Markets:

An Alternative Test
指導教授：廖東亮博士
研究生：蔡麗雀
中華民國一百零六年六月
Value Premium in the European Stock Markets: An Alternative Test
誌謝
我要感謝的人很多。首先，我要感謝我的家人，在我就讀博士這 8 年期間的
關心支持與幫助。我也要感謝我的學長，徐川皓及我的同學，熊令瑜，謝謝您們
時常在我遇到困難時，給我許多的鼓勵與協助。最重要，我要感謝我的指導教授,
廖東亮老師。廖老師對學術研究嚴謹的精神，讓我十分敬佩。也感謝老師總是耐
心地指導我寫論文，我才能順利完成博士學位。
最後，感謝所有口試老師對我的幫助及鼓勵，特別是楊明晶老師及江怡蒨老
師，謝謝您們提出許多寶貴的建議與指正，幫助本文有更多的進步。
蔡麗雀謹誌於
逢甲大學金融博士學程
2017 年 6 月
ii FCU-Thesis & Dissertations (2017)

Abstract
This study uses an alternative method, stochastic dominance (SD) test, to
examine the value premium on the basis of book-to-market (B/M), earnings-to-price
(E/P), cash earnings-to-price (CE/P), and dividend-to-price (D/P) indicators for the 14
major European markets, so a total of 56 market-indicator observations are formed.
The results show that 12, 42, and 2 of 56 observations, 21.4%, 75%, and 3.6%, are
found to be the existence, disappearance and reversal of the value premium,
respectively, before 2008 financial crisis, which is consistent with the previous studies
for European markets, like Fama and French (1998), Abhyankar et al. (2009), and Li
et al. (2009) for European stock markets. However, the percentages of the three
counterparts are 3.6%, 66.1%, and 30.3%, respectively, after 2008. Comparing
results for two periods show that the existence of the value premium sharply decreases
from 21.4% to 3.6%, while the reversal of the value premium dramatically increases
from 3.6% to 30.3% after 2008, which is first documented for the European markets
in the literature. Whether this regularity persists in European markets is worth
continual concern.
Key words: value premium; reversal of the value premium ; stochastic dominance
iii FCU-Thesis & Dissertations (2017)

摘要
本文使用隨機優勢方法，探討歐洲 14 個國家的股票市場價值溢酬之現象。
再搭配 4 個財務指標，分別是帳面市價比(B/M)，益本比(E/P)，現金盈餘市價比
(CE/P)和股利市價比(D/P)，因此形成了總共 56 個市場指標觀察值。在 2008 年金
融危機之前的研究結果發現 56 個觀察值中有 12 個價值溢酬、42 個消失、2 個反
轉，分別佔 21.4%、75%和 3.6%。此次研究結果發現與 Fama 和 French (1998)，
Abhyankar et al. (2009)和 Li et al. (2009)有一致性的結果。然而，在 2008 年金融
海嘯之後，本文發現價值溢酬的結果有很大差異，在兩個時期 2008 前和 2008 後
的比較結果顯示，價值溢酬的存在從 21.4%急劇下降到 3.6%，而價值溢酬反轉
從 3.6%急劇增加到 30.3%，這是在歐洲市場文獻中是首次發現。因此，歐洲股
票市場的價值溢酬現象是否是規律且持續性應值得持續關注的。
關鍵字：價值溢酬、價值溢酬反轉、隨機優勢
iv FCU-Thesis & Dissertations (2017)

Contents
1. Introduction ................................................................................................................ 1
2. Literature Review....................................................................................................... 4
2.1 Value Premium ................................................................................................................ 4
2.2 Stochastic Dominance ..................................................................................................... 7
3. Data and Methodology ............................................................................................... 8

4. Empirical Results ..................................................................................................... 18
4.1 Empirical Results for the Full Sample Period ............................................................... 18
4.2 Empirical Results before and after 2008 ....................................................................... 27
4.3 Discussion ..................................................................................................................... 34
5. Conclusions .............................................................................................................. 40
References ................................................................................................................ 41
Appendix ……………………………………………………………………………48
v FCU-Thesis & Dissertations (2017)

List of Figures
Figure 1: The CDF curves of value (bold line) and growth (dotted line) portfolios for
the Austrian stock market before 2008 ...................................................... 19
Figure 2: The CDF curves of value (bold line) and growth (dotted line) portfolios for
the Austrian stock market after 2008 ........................................................... 20
Figure 3: Compounded returns for the UK and Austria before 2008, (a) the UK,
1975-2007, (b) Austria, 1989-2007 ............................................................ 38
Figure 4: Compounded returns for Italy and Ireland after 2008, (a) Italy, 2008-2014,
(b) Ireland, 2008-2014 ................................................................................. 39
vi FCU-Thesis & Dissertations (2017)

List of Tables
Table 1: Summary statistics for the monthly returns on value and growth portfolios
formed on the basis of B/M, E/P, CE/P, and D/P ratios for the European
markets for the full sample period ............................................................... 11
Table 2: Stochastic dominance tests of value versus growth portfolios formed on the
basis of B/M, E/P, CE/P, and D/P ratios for the full sample period ............. 25
basis of B/M, E/P, CE/P, and D/P ratios for the sample period before 2008
...................................................................................................................... 30
basis of B/M, E/P, CE/P, and D/P ratios for the sample period from January
2008 to December 2014. .............................................................................. 32
vii FCU-Thesis & Dissertations (2017)

1. Introduction
Many empirical studies have found that value stocks with higher ratios of
book-to-market (B/M), earnings-to-price (E/P), cash earnings-to-price (CE/P), or
dividend-to-price (D/P) dominate growth stocks with lower corresponding ratios.
This phenomenon is known as the value premium.1 The presence of value premium
in a stock market means that firms with high book-to-price (B/M), earnings-to-price
(E/P), cash earnings-to-price (CE/P), or dividend-to-price (D/P) ratios yield higher
average returns than those firms associated with the corresponding low ratios (Fama
and French, 1998; Bauman et al., 1998; Abhyankar et al., 2008, 2009). The rationale
behind the results varies, depending on whether the risk-based model or the
behavioral-based model is used. According to the risk-based model, the
higher-than-average returns for the value-growth strategy reflect a compensation for
bearing more risk (Fama and French, 1992, 1993), but the behavioral-based model
argues that value premium is likely due to mispricing (De Bondt and Thaler, 1985).
The evidence presented by Capaul et al. (1993), Fama and French (1998),
Arshanapalli et al. (1998), and Bauman et al. (1998) suggests that value portfolios
offer investors relatively more-favorable returns than growth portfolios in developed
non-U.S. markets. Dimson et al. (2003) find a strong value premium in the United
Kingdom for the period 1955-2001. Recently, while Fama and French (2012) find
1. Three explanations have been put forward for the value premium. The risk-based explanation,
asserted by Fama and French (1993), Chen and Zhang (1998), Zhang (2005), and Xing (2008),
argues that the market is efficient and the premium is a compensation for risk. Second, the
behavioral-based explanation is presented by De Bondt and Thaler (1985), Haugen (1995), and La
Porta et al. (1997). They ascribe the value premium to investors’ judgment biases and to the
forecast errors while extrapolating past stock returns. The third position, argued by Black (1993)
and MacKinlay (1995), is that the value premium is sample-specific.
1
FCU e-Thesis & Dissertations (2017)
value premiums in average returns for the Europe region, Walkshäusl (2015) enhances
the value-growth strategies of Europe by taking into account the firm’s equity
financing activities. Finally, Lee et al. (2014) provide evidence that value stocks
significantly underperformed growth stocks during the 2008 financial crisis, and
Chung et al. (2016) document that the value premium of the Australian and New
Zealand markets has become weak since the 2008 crisis.
However, Abhyankar et al. (2009) question the argument that the value premium
is pervasive around the world, because they find that there are no significant
stochastic dominance relationships between value and growth portfolios for the UK,
France, Germany, and Italy. This study uses portfolios of European firms sorted on
various value-growth proxies to examine whether the return distribution of value
portfolio stochastically dominates that of a growth portfolio. Our statistical
inferences from the perspective of stochastic dominance do not depend on any asset
pricing model. If the distribution of stock returns is such that all expected utility
maximizers prefer value stocks to growth stocks, then risk compensation is unlikely to
be a compelling explanation for the superior performance of a value-growth
investment strategy (Seyhun, 1993).
Capaul et al. (1993) note that they are unable to predict whether the phenomenon
of value premiums will continue, diminish or entirely disappear, since they lack a well
articulated theory to explain the superior performance of the value-growth strategy.
This study examines the relative performance of value versus growth through the lens
of stochastic dominance for the recent period, after 2008.
Zhang (2005) argues that risk/return dispersions between stocks are lower in
good times, and Petkova and Zhang (2005) argue that value stocks are riskier than
2
growth stocks in bad times. According to the risk-based models in resolving the
value premium puzzle, if value stocks are fundamentally riskier, they must
underperform growth stock during poor worldwide economic conditions (Lakonishok
et al., 1994). However, Lakonishok et al. (1994) show that value stocks outperform
growth stocks during the recession period. Given the advantages of the stochastic
dominance approach, we finally reexamine the stochastic dominance relations
between value and growth stocks for the full sample periods and two sub-periods,
before and after the 2008 financial crisis. This study uses the Linton et al. (2005)
test (hereafter LMW) to examine whether value stocks outperform growth stocks
based on different value-growth proxies for European stock markets. LMW applies
the idea of the subsampling bootstrap procedure to the sampled blocks of data without
replacement to account for non i.i.d. (independently and identically distributed)
features of the data under examination. The appeal of the test is that it deals with the
issue in return autocorrelation.2 We present the first-order stochastic dominance (FSD)
and second-order stochastic dominance (SSD) relationships between value and growth
portfolios based on various value-growth proxies. While an FSD relationship of
value stocks over growth stocks implies that investors who prefer more to less would
have preferred value to growth stocks, an SSD relationship of value stocks over
growth stocks implies that investors who are risk-averse would have favored value
over growth portfolios.
The above four indicators, B/M, E/P, CE/P, and D/P, are used to examine the
pattern of the value premium for the 14 major EU countries, so a total of 56 (4 14)
2. In financial economics, many studies apply this test to evaluate performance, including the IPO
effect (Abhyankar et al., 2006), the currency carry trades (Fong, 2010), the monthly effect (Cho et
al., 2007; Lee et al., 2013), the dim sum bond (Fung et al., 2014), the share repurchases (Hsu et al.
2016), the fat cat portfolio (Lin et al., 2015), the journal rankings (Kao et al., 2016), and the value
effect (Hsu et al., 2015; Chung et al., 2016).
3
market-indicator observations can be formed. Our main findings for the pre-2008
financial crisis period show that 12, 42, and 2 of 56 market-indicator observations,
21.4%, 75%, and 3.6%, are observed to be the existence, disappearance and reversal
of the value premium, respectively. Comparing to our results which is consistent
with Fama and French (1998), 22% and 78%, respectively, are found to be the
existence and disappearance of the value premium during the 1975 to 2009. These
results are also similar to those of Fama and French (1998), Abhyankar et al. (2009),
and Li et al. (2009) for European stock markets. After 2008, however, the
percentages of the three counterparts are 3.6%, 66.1%, and 30.3%, respectively.
Comparing results for two periods show that the existence of the value premium
sharply decreases from 21.4% to 3.6%, while the reversal of the value premium
dramatically increases from 3.6% to 30.3% after 2008, first documented in the
literature. Whether this regularity persists is worth continual concern.3
The remainder of this thesis is structured as follows. Section 2 presents the
literature review. Section 3 introduces the data and methodology. The empirical
results are presented in Section 4, and Section 5 presents the conclusion.
2. Literature Review
2.1 Value Premium
Many empirical studies have found that value stocks with higher ratios of
book-to-market (B/M), earnings-to-price (E/P), cash earnings-to-price (CE/P), or
dividend-to-price (D/P) outperform growth stocks with lower corresponding ratios.
3. There are several possible explanations for the disappearance or reversal of market anomalies,
including Murphy’s Law, investors' awareness of the anomalies, the deregulation of the financial
markets, and so on, discussed in Discussion Section.
4
This phenomenon is known as the value premium. For example, Rosenberg et al.
(1985), Capaul et al. (1993), Lakonishok et al. (1994), Fama and French (1992, 1993,
1995, 1996, 1998, 2006, 2012), Bauman et al. (1998), Zhang (2005), Xing (2008),
Abhyankar et al. (2009) and Asness et al. (2013) have documented that value
portfolios offer investors relatively more-favorable returns than growth portfolios in
US markets. As for outside US markets, Chan et al. (1991, 1993), Capaul et al.
(1993), Bauman et al. (1998), Dimson et al. (2003), Abhyankar et al. (2009),
Gharghori et al. (2013) and Asness et al. (2013) also report the value premium in the
Australian, Canadian, Japanese and some European markets, respectively.
Many financial anomalies have been documented in the literature, but some
studies also provide evidence that some of the anomalies have disappeared or even
reversed. Horowitz et al. (2000a, 2000b), for example, have found that the size
premium was disappearing in US stock markets from 1982–97. In addition, Yamori
and Mourdoukoutas (2003) find that the day-of-the-week effect disappeared in the
yen-dollar currency market for the 1990s, and Jiang and Yamada (2011) also reported
the reversal of the premium of small stocks over large stocks in the Japanese stock
market after the mid-1990s. As for European stock markets, Fama and French (1998)
and Bauman et al. (1998) show that the value premium exists in some European stock
markets.4 Abhyankar et al. (2009) also find that the performance of value and
growth portfolios cannot be distinguished for some indicators in four countries of G7,
4. More specifically, Fama and French (1998) examine the value premium on the basis of B/M,
E/P,CF/P, and D/P indicators for the 8 European markets, so a total of 32 (4  8) market-indicator
observations are formed. The results show that 7 and 25 of 32 observations, 22.0% and 78%, are
found to be the existence and disappearance of the value premium during the 1975-95 period
(Table3, p. 1980). Bauman et al. (1998) also examine the 13 European B/M portfolios and when
the compound returns and their spreads are compared for these markets, in 6 markets (46%), value
portfolios have higher returns, in 2 markets (8%) have ties, and in 6 markets (46%) growth
portfolios have higher returns in the 1986-96 period (Table 6, p. 84).
5
including the UK, France, Germany, and Italy.5 In addition, Fama and French (2012)
document that the existence, disappearance and mild reversal of the value premium
respectively exist in small, medium and large firms in the 25 European size-B/M
portfolios during the 1989 to 2011.6 Recently, Lee et al. (2014) provide that value
stocks significantly underperform growth stocks during the 2008 financial crisis in US
markets, despite a positive value premium before the crisis, and Chung et al. (2016)
document that the value premium of the Australian and New Zealand markets has
become weak lately.
The value premium has to be re-examined for the Europe, the second largest
economy in the world in terms of nominal GDP, for numerous reasons. First, the
recent evidence of Fama and French (2012) shows that a value pattern only exists for
microcaps and a mild reverse value pattern appears for megacaps for the European
size-B/M portfolios. In addition, though the results of Asness et al. (2013) display
that value premium for B/M portfolios also exists in European stock markets during
the period of 1972 to 2011, their sample merely includes the largest 20% of stocks in
each market. This study uses a comprehensive examination of value premium,
including four valuation ratios for the 14 European stock markets,7 on the outside-US
data set examines whether the disappearance or reversal of the value premium, noted
above, has been widespread. Second, Lim et al. (2008), Hoque et al. (2007) and Lee
et al. (2014) have documented that a financial crisis or market crash causes a
5. The popular four indicators, as noted in Footnote 2, are also investigated in Abhyankar et al.
(2009),their findings show that 5 and 11 of 16 (4  4) observations, 31% and 69%, are observed to
be existence and disappearance of the value premium during the 1975-2003 period (Table 2, p.
227).
6. Please refer to Fama and French (2012), Table 4 and second paragraph, pages 465 and 468,
respectively.
7. Only B/M indicator is used to examine the value anomaly in Bauman et al. (1998), Fama and
French(2012) and Asness et al. (2013) for European markets. Furthermore, Fama and French
(1998) and Abhyankar et al. (2009) investigate the value pattern with four above indicators for only
eight and four European markets, respectively.
6
significant change in the level of market efficiency. Our study period is from
1975-2014, therefore, not only the value pattern of the full sample period is examined
but the value anomalies of two sub-periods, before and after the 2008 financial crisis,
are also investigated for European markets. Third, the value premium is one of the
most important anomalies that challenge the well-accepted theory of efficient markets.
And value investing is the popular investment styles followed by professional
investors; therefore, the findings of this study have also implications for the investors.
2.2 Stochastic Dominance
The Capital Asset Pricing Model (CAPM) is often used to examine whether the
value premium exists in the literature.8 However, Roll (1977) seriously doubts the
validity of the CAPM on both empirical and theoretical grounds; therefore, value
anomalies may be interpreted as rejecting the CAPM hypothesis rather than the
efficient market hypothesis.9 In addition, the disadvantage of the CAPM is that it
mostly relies on the assumption of a normal distribution of returns and/or the concave
investor utility function.10 To avoid these argumentations as in the literature, this
study uses distribution-free analysis, namely, stochastic dominance (SD), to
investigate the relative performance of value and growth portfolios. Some features
of SD are briefly described in the following.
The first advantage of the SD analysis over parametric tests becomes apparent
8. The famous three-factor model and four-factor, of course, are also often used to examine the value
premium in the literature.
9. As pointed out by Fama (1970), Levy and Lerman (1985), and Seyhun (1993), most tests of the
above anomalies are a joint test of the CAPM validity and market efficiency. As a result, it is
difficult to determine whether a rejection of joint hypothesis indicates market inefficiency or failure
of the CAPM (or both).
10.The normality assumption of stock returns is obviously inappropriate because Fama (1965) and
Schwert (1990) have documented that stock return distributions are fat-tailed; that is, the extreme
tails of return distributions carry higher probability density than normal distribution.
7
when the stock return distribution is non-normal, as the SD approach does not require
any assumption about the nature of the distribution and therefore can be used for any
type of distribution. Next, the SD theory, which reveals the entire distribution,
recovers all information from the distribution while traditional parametric tests,
depending only on the mean and variance, omit all information from higher moments.
A third advantage is that the SD theory makes less restrictive assumptions regarding
investor utility functions, while the CAPM model is derived based on the assumption
that investor utility functions must be concave.
There are several SD tests in the econometric literature. A new bootstrap-based
test, the LMW test (Linton, Maasoumi and Whang (2005)), is used to examine
whether value stocks outperform growth stocks based on different value-growth
proxies for the 14 European stock markets in this study. LMW applies the idea of
the sub-sampling bootstrap procedure to the sampled blocks of data without
replacement to account for non i.i.d. (independently and identically distributed)
features of the data under examination. The appeal of the test is that it deals with the
issue in return autocorrelation.
3. Data and Methodology

This study is consisted of 14 European markets: Austria, Belgium, Denmark,
Finland, France, Germany, Ireland, Italy, the Netherlands, Norway, Spain, Sweden,
Switzerland, and the United Kingdom. For each market, we use monthly return data
of value and growth portfolios based on the above four popular valuation ratios: B/M,
E/P, CE/P, and D/P ratios. The data are collected using Kenneth R. French's Data
Library and the sample period is from 1975 to 2014 in 9 of 14, and the remaining are
8
from the 1980s to 2014.11 Value and growth portfolios are first constructed at the
end of December each year by sorting on the four ratios. Next, the stocks’ returns
are calculated for the following twelve months. Stocks in the top 30% of each ratio
are defined as value portfolios, while stocks in the bottom 30% are defined as growth
portfolios.
Next, the SD theorems are briefly described as follows. 12 The cumulative
distributions of the returns of two risky options X and Y are denoted by G X and
Hy . Let QG ( p) and QH ( p) denote the pth order quantiles of the distributions
G and H . Let U1 be the set of all non-decreasing utility functions and U 2 be
the set of all non-decreasing concave utility functions. This study defines that G
dominates H in U i , (for i = 1, 2) or GDi H , if for every u  U i ,
EGu( x)  EH u( y) . Using the quantile approach, the first- and second -order
stochastic dominance (FSD and SSD) rules are written as follows.
Theorem 1 (FSD): Gx D1H y if and only if, QG ( p)  QH ( p) , p with a strict
inequality for at least one p.
p
Theorem 2 (SSD): Gx D2 H y if and only if 0 [QG (t )  QH (t )]dt  0 , p with a
strict inequality for at least one p.
The economic intuition of the above SD theorems is discussed as follows. FSD,
as in Theorem 1, implies that the CDF of G is everywhere to the right of the CDF of
11. The sample period of each market is described in Table 1 in detail. The website address of
Kenneth R. French's Data Library is http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/.
12. The contents of the SD theory in this section are slightly modified from Levy and Kroll (1979).
Readers interested in detail of the SD theory may consult Levy and Kroll (1976), Levy and Kroll
(1978), Levy (1992), Post (2003), Ke et al. (2007), and Linton et al. (2005).
9
H. In other words, investors prefer G to H regardless of their risk preferences as
long as their utility functions are monotonically increasing; i.e., more return is better
than less. Under SSD, shown in Theorem 2, the area under G is everywhere smaller
than that under H. In other words, investors who prefer G to H are required to be
risk-averse; i.e., investors with increasing and concave utility functions. It is worth
mentioning that while lower order SD implies higher order SD, this does not
necessarily imply a converse relationship. As mentioned above, a new
bootstrap-based test, the LMW test (Linton, Maasoumi and Whang, 2005), is used to
compare the relative performance of various portfolios in this study. The LMW test
is briefly introduced in the Appendix.
Table 1 gives descriptive statistics of the monthly returns of value and growth
portfolios formed on the basis of the above four indicators. The results show that
value portfolios generally generate higher mean returns, and higher standard
deviations than growth portfolios based on B/M, E/P, and CE/P indicators for each
country. However, the D/P ratio of value portfolios appears to show higher monthly
return and lower standard deviations than growth portfolios in Austria, Denmark,
Finland, Germany, Norway, Spain, Sweden, and the UK. The JB values in Table 1
indicate that all of the return distributions for various portfolios are non-normal,
making them appropriate to apply non-parametric tests based on SD to evaluate the
performance of value and growth portfolios.
10
Table 1: Summary statistics for the monthly returns on value and growth portfolios formed on the basis of B/M, E/P, CE/P, and D/P ratios for the
European markets for the full sample period.
Country Ratio Level Mean% Std.% Skewness Kurtosis Min Median Max JB1
Austria B/M High 1.234 8.782 0.137 5.729 -34 1.130 39 97.79***
1989/01~ Low 0.677 7.047 -0.276 7.012 -37 0.285 29 213.21***
2014/12 E/P High 1.259 8.254 -0.287 5.031 -36 1.080 30 57.92***
Low 0.594 7.216 -0.222 6.184 -37 0.470 30 134.38***
CE/P High 1.795 8.387 -0.156 4.367 -33 1.990 28 25.57***
Low 0.606 7.211 -0.336 5.969 -36 0.650 30 120.47***
D/P High 1.375 7.349 0.021 5.684 -29 1.370 34 93.67***
Low 0.342 7.826 -0.149 6.441 -40 0.470 29 155.07***
Belgium B/M High 1.452 6.957 0.806 10.769 -27 1.150 54 1259.02***
1975/01 Low 1.196 5.725 -0.154 5.095 -24 1.285 23 89.69***
2014/12 E/P High 1.341 7.082 -0.612 10.075 -46 1.480 34 1030.99***
Low 1.251 5.621 -0.017 4.999 -24 1.155 24 79.94***
CE/P High 1.609 6.846 0.162 4.633 -26 1.320 30 55.42***
Low 1.212 5.964 -0.022 5.590 -26 1.120 28 134.20***
D/P High 1.327 6.356 -0.626 10.732 -42 1.330 33 1227.23***
Low 1.198 6.097 -0.465 5.552 -30 1.410 22 147.54***
(continued)
11
Denmark B/M High 1.162 6.933 -0.287 5.558 -33 1.575 29 89.34***
1989/01 Low 1.225 6.372 -0.720 5.577 -31 1.250 17 113.26***
2014/12 E/P High 0.972 7.142 0.063 5.771 -33 0.835 31 100.00***
Low 0.894 6.369 -0.518 3.755 -22 1.235 17 21.37***
CE/P High 1.325 7.627 -0.096 5.777 -33 1.380 31 100.74***
Low 1.286 6.908 -0.862 5.792 -33 1.550 17 139.98***
D/P High 1.166 6.913 0.247 7.209 -29 1.540 37 233.47***
Low 0.904 6.959 -0.599 4.590 -32 1.335 18 51.51***
Finland B/M High 1.270 8.094 0.789 5.996 -19 1.080 44 154.73***
1988/01~ Low 1.291 10.028 0.050 4.068 -35 1.170 36 15.55***
2014/12 E/P High 1.363 7.855 0.094 3.981 -24 1.555 28 13.47***
Low 1.208 9.950 0.231 4.133 -35 0.975 37 20.21***
CE/P High 1.208 7.970 0.270 4.577 -25 1.390 39 37.53***
Low 1.454 10.328 0.023 4.027 -35 1.475 37 14.27***
D/P High 1.170 7.792 0.442 4.551 -20 1.195 32 43.03***
Low 1.150 10.252 0.077 4.099 -35 1.110 37 16.62***
(continued)
12
France B/M High 1.444 7.835 -0.036 4.317 -30 1.450 29 34.81***
1975/01 Low 1.035 6.478 -0.176 4.478 -23 1.230 29 46.13***
2014/12 E/P High 1.445 7.518 -0.061 4.660 -28 1.315 31 55.44***
Low 0.995 6.628 0.111 4.960 -22 1.150 35 77.85***
CE/P High 1.497 7.750 0.100 4.270 -26 1.340 34 33.07***
Low 1.005 6.658 -0.045 4.830 -24 1.080 31 67.15***
D/P High 1.477 6.912 -0.059 4.446 -25 1.580 29 42.11***
Low 0.871 6.870 -0.177 4.647 -27 0.840 28 56.74***
Germany B/M High 1.393 6.712 -0.365 4.569 -27 1.510 25 59.90***
1975/01 Low 0.992 6.465 -0.342 4.789 -27 1.190 20 73.34***
2014/12 E/P High 1.108 6.611 -0.433 5.204 -32 1.345 25 112.14***
Low 0.997 6.507 -0.165 4.844 -24 1.275 28 70.17***
CE/P High 1.428 6.330 -0.400 4.117 -23 1.730 20 37.74***
Low 0.795 6.246 -0.321 5.180 -29 1.065 25 103.28***
D/P High 1.246 6.308 -0.133 4.996 -23 1.245 30 81.11***
Low 1.005 6.686 -0.178 5.740 -30 1.185 32 152.66***
(continued)
13
Ireland B/M High 1.160 10.601 0.558 6.879 -39 1.070 52 195.49***
1991/01~ Low 0.845 8.088 0.229 10.998 -32 1.650 55 770.13***
2014/12 E/P High 0.945 10.501 0.610 11.192 -45 1.010 60 823.08***
Low 0.756 6.807 -0.281 4.223 -26 0.575 24 21.75***
CE/P High 1.536 11.585 0.939 7.742 -45 0.780 59 312.24***
Low 0.734 6.980 -0.569 4.097 -24 0.905 18 29.96***
D/P High 1.438 13.288 1.887 23.564 -68 1.190 100 5245.36***
Low 1.038 6.153 -0.276 3.914 -22 1.000 18 13.68***
Italy B/M High 0.872 8.724 0.350 4.209 -22 0.545 41 39.03***
1975/01 Low 0.991 7.386 0.150 3.809 -29 1.025 26 14.88***
2014/12 E/P High 1.019 8.471 0.733 6.530 -22 0.895 54 292.12***
Low 0.857 7.640 0.178 3.685 -25 0.660 29 11.92***
CE/P High 1.069 8.358 0.261 3.862 -22 0.730 37 20.32***
Low 0.560 7.555 0.330 4.970 -27 0.305 37 86.35***
D/P High 1.105 8.021 0.322 4.267 -22 0.940 38 40.38***
Low 0.855 7.965 0.168 3.895 -30 0.820 28 18.30***
(continued)
14
The B/M High 1.313 7.674 -0.352 5.138 -38 1.445 28 101.35***
Netherlands Low 1.211 5.169 -0.218 4.221 -17 1.435 23 33.63***
1975/01 E/P High 1.412 7.373 -0.383 7.468 -43 1.395 36 411.07***
2014/12 Low 0.926 6.101 -0.416 5.796 -30 1.085 25 170.17***
CE/P High 1.093 8.390 -0.552 7.475 -52 1.410 37 424.83***
Low 1.147 5.798 -0.523 6.418 -34 1.240 23 255.52***
D/P High 1.368 6.988 -0.261 7.305 -35 1.415 37 376.17***
Low 0.883 6.591 -0.609 6.744 -38 1.190 27 310.07***
Norway B/M High 1.139 9.730 -0.313 4.093 -32 1.450 34 22.99***
1986/01~ Low 0.892 7.891 -0.938 6.795 -36 1.005 19 259.88***
2014/12 E/P High 1.346 9.213 -0.386 4.252 -35 1.755 27 31.34***
Low 0.853 8.279 -0.942 6.220 -41 1.025 21 201.76***
CE/P High 1.686 9.237 -0.164 3.784 -29 1.290 29 10.46***
Low 0.657 8.596 -0.836 6.187 -40 0.835 22 187.87***
D/P High 1.333 8.547 -0.616 4.670 -34 1.720 25 62.44***
Low 0.757 8.657 -0.713 5.694 -40 0.845 23 134.74***
(continued)
15
Spain B/M High 0.999 8.083 0.055 4.194 -26 1.010 29 28.75***
1975/01 Low 0.845 7.291 -0.121 5.027 -31 0.500 26 83.31***
2014/12 E/P High 1.310 7.523 0.223 4.342 -24 1.200 31 40.01***
Low 0.744 7.082 -0.082 4.959 -33 0.335 25 77.33***
CE/P High 1.037 8.198 0.048 3.796 -25 1.115 28 12.84***
Low 0.727 7.523 0.155 5.195 -28 0.380 31 98.26***
D/P High 1.161 7.183 0.138 4.643 -23 1.020 30 55.47***
Low 0.765 7.300 0.114 4.895 -31 0.650 28 72.83***
Sweden B/M High 1.732 8.129 0.290 4.228 -28 1.090 38 36.91***
1975/01 Low 1.238 7.159 -0.158 4.308 -26 1.025 28 36.24***
2014/12 E/P High 1.737 7.483 0.146 4.970 -29 1.840 39 79.35***
Low 1.338 7.247 -0.023 4.417 -24 0.910 29 40.18***
CE/P High 1.637 7.816 0.282 4.797 -28 1.420 39 70.94***
Low 1.143 7.534 -0.086 4.592 -28 1.050 28 51.28***
D/P High 1.734 7.416 -0.052 4.390 -30 1.605 30 38.84***
Low 1.063 7.527 -0.222 4.681 -30 1.165 30 60.49***
(continued)
16
Switzerland B/M High 1.182 6.516 -0.289 5.214 -31 1.535 29 104.77***
1975/01~ Low 1.091 5.226 -0.242 5.097 -21 1.235 25 92.64***
2014/12 E/P High 1.121 5.980 -0.059 4.471 -22 1.315 25 43.55***
Low 1.055 5.574 -0.220 5.640 -25 1.165 24 143.30***
CE/P High 1.077 5.977 -0.227 3.961 -21 1.335 23 22.59***
Low 0.992 5.650 -0.209 6.422 -28 0.965 28 237.63***
D/P High 1.260 6.105 -0.323 5.773 -34 1.285 24 162.13***
Low 1.027 5.777 -0.300 5.035 -28 1.190 22 90.04***
UK B/M High 1.397 7.012 0.914 10.511 -27 1.245 53 1195.09***
1975/01 Low 1.203 6.276 1.163 13.857 -24 1.155 53 2465.63***
2014/12 E/P High 1.510 6.705 0.997 11.315 -25 1.365 54 1462.40***
Low 1.150 6.435 1.054 13.735 -26 0.900 54 2393.50***
CE/P High 1.558 6.792 1.100 12.701 -22 1.540 57 1978.78***
Low 1.128 6.420 1.099 12.978 -25 0.945 53 2087.73***
D/P High 1.384 6.542 0.992 10.206 -24 1.345 48 1117.23***
Low 1.153 6.739 1.027 13.404 -25 0.875 57 2249.47***
1. *, **, and *** indicate significance at the 10%, 5%, and 1% levels, respectively.
17
4. Empirical Results
This section includes two subsections. The results of the full sample period and
those of the before and after 2008 financial crisis periods are presented in the first and
second sub-sections, respectively.
4.1 Empirical Results for the Full Sample Period
Some examples of the application of the SD rules are first presented in this
subsection. Figures 1 and 2 show the CDF curves of value (bold line) and growth
(dotted line) stocks of the four indicators for the Austrian stock market. The results
of Figure 1 show that the CDF curves of value and growth portfolios cross each other
for each indicator before the 2008 financial crisis. The phenomena imply that there
is no first-degree stochastic dominance (FSD) of value over growth portfolios for each
indicator in the Austrian market. In addition, similar phenomena are found in Figure
2, whereby the figures show that there is no FSD relation for each indicator after 2008
as well.
The above figures confirm that there are no FSD relationships between value and
growth portfolios based on the four ratios in the Austrian markets.
18
Table 4: Average standardized commodity returns for negative events during the sample period
N1 Day -3 Day -2 Day -1 Day 0 Day 1 Day 2 Day 3

Softs 1,243 -0.03*2 0.12*** -0.10*** -2.56*** -0.04** 0.16*** -0.06***
t Statistic -1.69 6.31 -5.16 -137.24 -2.39 8.72 -3.12
Grains 1,402 -0.04 -0.09*** -0.24*** -2.64*** -0.14*** 0.01 0.00
t Statistic -1.60 -3.72 -9.93 -109.39 -5.97 0.40 -0.11
Livestocks 925 -0.16*** -0.22*** -0.32*** -2.34*** -0.13*** -0.01 -0.02
t Statistic -5.37 -7.55 -10.91 -78.85 -4.41 -0.27 -0.84
Energies 517 -0.01 -0.03 -0.10*** -2.96*** -0.01 0.04 0.10***
t Statistic -0.22 -0.92 -2.70 -81.19 -0.15 1.18 2.71
Metals 1,117 -0.07*** -0.05** -0.17*** -2.73*** -0.02 0.05** -0.09***
t Statistic -2.85 -2.11 -7.30 -115.88 -0.89 2.14 -4.03
1. N is the number of the observations.
2. *, ** and *** indicate statistically significant at 10%, 5% and 1%, respectively.
Figure 1: The CDF curves of value (bold line) and growth (dotted line) portfolios for the Austrian stock market before 2008
19
Figure 2: The CDF curves of value (bold line) and growth (dotted line) portfolios for the Austrian stock market after 2008
20
All other markets also show the similar phenomenon. Thus, further
examination is needed; the formal LMW test, therefore, is used to compare the
performance of value and growth portfolios for each market.
Let V and G denote value and growth portfolios, respectively.13 To establish
the direction of SD between V and G, the LMW test is used to examine the two null
hypotheses. The first null hypothesis, H 01 : V  S G , indicates that value stocks
outperform growth stocks at the sth degree. The second null hypothesis indicates
that growth stocks dominate value stocks at the sth degree, H 02 : G SV . We
conjecture that value stocks offer investors relatively more-favorable returns than
growth stocks if we accept H 01 and reject H 02 . Additionally, if the two null
hypotheses are accepted, it implies that the performance of value and growth stocks
cannot be distinguished.14 Table 2 shows the empirical findings for the full sample
period for each market, and the following discussion is drawn from this table.
1) Using the weakest assumption on investor preferences of a non-decreasing
utility function ( u  0 ); i.e., the FSD test can be used to examine the performance of
'
value and growth portfolios. For example, the finding of the B/M indicator in the
Austrian market reveals that the p-value of the FSD test of H 01 is 0.011, lower than
5%. In contrast, the p-value for the opposite hypothesis H 02 is 0.000, also lower
than 5%. Specifically, the first null hypothesis, H 01 : V  S G , is rejected and the
13. This study follows Fong’s (2010) paper to design of our test strategy.
14. Four testing results of H 01 and H 02 are discussed in detail as follows: (1) Accept H 01 and H 02
and then concludes neither V  s G nor G sV . (2) Accept H 01 and reject H 02 and then
concludes V  s G . (3) Reject H 01 and accept H 02 and then concludes G sV . (4) Reject
H 01 and H 02 and then concludes neither V  s G nor G sV .
21
second null hypothesis, H 02 : G  S V , is also rejected; i.e., there is no FSD
relationship between value and growth portfolios for the B/M indicator in the Austrian
market, which confirms the findings of Figure 1. Furthermore, the test results of the
B/M indicator in the other 13 markets are similar to the Austrian evidence; that is, no
FSD relationship between value and growth portfolios exists in 14 markets for the
B/M indicator.
Next, the finding of the E/P indicator in Austria reveals that the p-value of the
FSD test for H 01 is 0.243 (higher than 10%) and the p-value for the opposite
hypothesis H 02 is 0.054 (lower than 10%), which implies that value portfolio
outperforms growth portfolio. In addition, the results of the E/P indicator for the
other 13 markets show that value portfolio also beats growth portfolio in France,
Netherland, Spain, and the UK, and that there is no stochastically dominate
relationship between value and that growth stocks for the remaining 9 markets. As
for the CE/P indicator, the evidence shows that the value premium only exists in
Germany and the UK, while value premium is not supported by the other 12 markets,
and vice versa.
For the D/P indicator, the results reveal the value premium exists in Austria,
France, the Netherlands, and Spain, and the performance of value and growth
portfolios cannot be distinguished with the FSD test for the remaining 10 markets.
The above evidence obviously shows that the relative performance of value and
growth portfolios for some indicators cannot be significantly distinguished with the
FSD test. Thus, when no further assumptions are made concerning the investor’s
preference structure, we cannot conclude whether the value premium exists in the
markets.
22
2) Assuming investors are risk-averse (concave non-decreasing utility function,
u '  0 and u ''  0 ), which most economists accept, then the SSD test can be used
to compare the performance of value and growth portfolios. The results of the B/M
indicator show that no SSD relationship is found between value and growth portfolios
for 13 stock markets. The only exception is the Netherlands, because the p-value of
the SSD test for H 01 is 0.016 (lower than 5%) and the p-value for the opposite
hypothesis H 02 is 0.655, which indicates the reversal of the value premium exists on
B/M indicator.
Next, the results of the E/P ratio fail to reject the existence of the value premium
in Austria, France, the Netherlands, Spain, and the UK. However, the performance
of value and growth stocks for E/P indicator cannot be distinguished for the remaining
9 markets. As the CE/P proxy, we find no evidence against the fact that value
premium exists in Austria, France, Germany, Norway, and the UK markets, but the
reversed value premium, like the B/M indicator, is supported by the Netherlands
evidence. In addition, there is no SSD of value over growth portfolios for CE/P
indicator in Belgium, Denmark, Finland, Ireland, Italy, Spain, Sweden, and
Switzerland, and vice versa.
Finally, the result of the D/P criteria shows that returns on value portfolio are
superior to those on growth portfolio in Austria, France, the Netherlands, and Spain
markets with the SSD test, while there are no significant dominance relationships
between value and growth portfolios for the remaining 10 markets.
In summary, Table 2 shows that the value portfolio outperforms growth portfolio
about 25% of market-indicator observations under B/M, E/P, CE/P and D/P ratio for
23
the full sample period. That is to say, the value premium doesn’t exist in the
remaining of 75% observations in the markets. The study reports that 14, 40, and 2
of 56 market-indicator observations,15 25.0%, 71.4%, and 3.6%, are found to be the
existence, disappearance and reversal of the value premium, respectively.
15. Based on the SSD results of B/M, E/P, CE/P, and D/P indicators show that the number of value
portfolios over growth portfolios for these four indicators is 0, 5, 5 and 4 observations, respectively.
In addition, the number of growth portfolios over value portfolio for these four indicators is 2
observations. For the remaining 40 observations show that returns on value portfolio do not
outperform those on growth portfolio, and vice versa.
24
Table 2: Stochastic dominance tests of value versus growth portfolios formed on the basis of B/M, E/P, CE/P, and D/P ratios
for the full sample period.
B/M E/P CE/P D/P
H 01 H 02 H 01 H 02 H 01 H 02 H 01 H 02
V G G V V G G V V G G V V G G V
Austria FSD 0.011**1 0.000*** 0.243 0.054* 0.011** 0.032** 0.249 0.000***
SSD 0.117 0.246 0.228 0.090* 0.206 0.029** 0.875 0.000***
Belgium FSD 0.359 0.110 0.271 0.228 0.234 0.147 0.322 0.121
SSD 0.175 0.384 0.133 0.848 0.191 0.183 0.615 0.356
Denmark FSD 0.147 0.602 0.209 0.635 0.430 0.811 0.312 0.509
SSD 0.349 0.789 0.356 0.652 0.326 0.736 0.698 0.392
Finland FSD 0.143 0.216 0.266 0.271 0.113 0.293 0.152 0.121
SSD 0.637 0.167 0.980 0.148 0.464 0.187 0.704 0.144
France FSD 0.049** 0.049** 0.592 0.017** 0.088* 0.000*** 0.918 0.059*
SSD 0.123 0.148 0.320 0.061* 0.151 0.052* 0.840 0.030**
Germany FSD 0.298 0.161 0.857 0.413 0.537 0.006*** 0.819 0.155
SSD 0.532 0.122 0.559 0.436 0.865 0.009*** 0.820 0.184
Ireland FSD 0.107 0.153 0.390 0.239 0.147 0.130 0.248 0.148
SSD 0.138 0.660 0.160 1.000 0.157 0.340 0.158 1.000
(continued)
25
B/M E/P CE/P D/P

H 01 H 02 H 01 H 02 H 01 H 02 H 01 H 02
Italy FSD 0.122 0.159 0.589 0.337 0.526 0.164 0.869 0.237
SSD 0.120 0.995 0.351 0.639 0.256 0.169 0.804 0.289
Netherland FSD 0.004*** 0.000*** 0.226 0.002*** 0.000*** 0.000*** 0.816 0.030**
SSD 0.016** 0.655 0.242 0.069* 0.013** 0.985 0.436 0.059*
Norway FSD 0.044** 0.050** 0.337 0.241 0.514 0.127 0.808 0.111
SSD 0.199 0.498 0.310 0.190 0.539 0.019** 0.597 0.183
Spain FSD 0.169 0.210 0.712 0.042** 0.202 0.115 0.888 0.078*
SSD 0.247 0.517 0.526 0.073* 0.317 0.398 0.635 0.069*
Sweden FSD 0.215 0.117 0.640 0.148 0.610 0.132 0.958 0.301
SSD 0.346 0.155 0.683 0.202 0.870 0.135 0.945 0.105
Switzerland FSD 0.036** 0.021** 0.153 0.174 0.163 0.113 0.902 0.242
SSD 0.148 0.627 0.250 0.429 0.226 0.268 0.500 0.208
UK FSD 0.065* 0.019*** 0.321 0.077* 0.341 0.059* 0.665 0.126
SSD 0.201 0.274 0.527 0.079* 0.421 0.068* 0.856 0.249
1. *, **, *** denote significance at the 10%, 5%, and 1% levels, respectively.
26
4.2 Empirical Results before and after 2008
As noted above, a financial crisis impacts the level of market efficiency, so the
full sample period is partitioned into before and after 2008 periods. The findings of
the LMW test for two subsamples are shown in Tables 3 and 4, respectively. The
following discussion is first drawn from Table 3, or the pre-crisis period.
1) The FSD test, as in the previous subsection, is again used to compare the
relative performance of various portfolios. The findings of B/M indicator display
that the performance of value and growth portfolios cannot be distinguished for all 14
markets before 2008, which findings are similar to those of full sample period.
Under the E/P criteria, the returns on value stocks are superior to those on growth
stocks only in Spain and the UK, and there are no SD relationships between value and
growth stocks for the remaining 12 markets. As for the CE/P indicator, the results
show that the value premium exists in Austria, France, Germany, and the UK, while
value stocks do not outperform growth stocks for the other 10 markets, and vice versa.
Under the D/P indicator, the evidence indicates that value stocks beat growth stocks
for Austria, France, the Netherlands, and Spain, as well as there are no FSD
relationships between value and growth portfolios for the remaining 10 markets.
2) If we make the additional assumption related to risk aversion, the SSD test can
be employed to investigate the performance of various portfolios. The results of
SSD test for B/M indicator show that the performance of value and growth portfolios
still cannot be distinguished for the 13 markets. The only exception is that the
reversal of the value premium exists in the Netherlands. Next, for the E/P indicator,
value stocks outperform growth portfolios in Austria, Spain, and UK markets, and the
27
existence or the reversal of the value premium is not observed for the other 11
markets. As for the CE/P indicator, the results provide no evidence against value
stocks dominating growth stocks in Austria, France, Germany, Italy, Norway, and the
UK. However, the evidence of the CE/P indicator, as B/M indicator, also shows that
growth stocks outperform value stocks in the Netherlands, as well as a significant
value premium or reversed value premium is not found for the remaining 7 markets.
Finally, for the D/P indicators, the results indicate that value stocks are dominant over
growth stocks in Austria, France, the Netherlands, and Spain, while the value
premium or the reversed value premium does not exist in all the other markets.
In short, the evidence from the pre-2008 period show that 12, 42, and 2 of 56
market-indicator observations, 21.4%, 75%, and 3.6%, are found to be the existence,
disappearance and reversal of the value premium, respectively. It is obviously that
the results of the first sub-period are almost the same as those of the full sample
period.
Next, the results of LMW test for the post-crisis period are shown in Table 4.
The main conclusions are as follows.
1) The FSD test is again first used to examine whether the reversal of the value
premium exists after 2008. The results of the B/M indicator present that the value
premium goes into reverse in Austria, Belgium, Germany, Italy, and Switzerland, and
there are no FSD of value over growth stocks for the remaining 9 markets, and vice
versa. Besides, the evidence of the E/P and CE/P indicators also shows that the
value premium reverses in Austria and France, and no significant SD relation between
value and growth stocks is observed for the remaining 12 markets. As for the D/P
sorted portfolios, the reversal of the value premium exists in Germany and Spain, and
28
the value premium only persists in Switzerland. In addition, the performance of
value and growth portfolios still cannot be distinguished with FSD test for the other
11 markets.
2) As in the previous subsection, the SSD test is also again used to compare the
relative performance of value versus growth portfolios. For the B/M indicator, the
reversal of the value premium is supported by most countries, while there are no SD
relationships between value and growth portfolios for Finland, Ireland, Norway, and
Sweden. For the E/P indicator, the value premium reverses in Austria and France,
while value stocks do not outperform growth stocks for the other 12 markets, and vice
versa. As for the CE/P indicator, the results report that the reversal of the value
premium exists in Austria, France, and Ireland, as well as the performance of value
and growth stocks still cannot be distinguished for the remaining 11 markets. As for
the D/P sorted portfolios, the findings provide no evidence against value stocks
dominating growth stocks in Austria and Switzerland, and the value premium reverses
in Germany and Spain. In addition, there are no significant SD relationships
between value and growth portfolios for the other 10 markets.
In short, the results of the post-2008 period display that 2, 37, and 17 of 56
market-indicator observations, 3.6%, 66.1%, and 30.3%, are found to be the existence,
disappearance and reversal of the value premium, respectively. An important finding
is that over thirty (30.3%) percent observations go into reverse, which is first
documented for the European stock markets in the literature. That is to say, our
findings indicate that the trend of the value premium in the European markets is
similar to that of the calendar or size anomaly in some developed financial markets
during recent years. The phenomena are discussed in the next section.
29
for the sample period before 2008.
B/M E/P CE/P D/P
H 01 H 02 H 01 H 02 H 01 H 02 H 01 H 02
Austria FSD 0.063* 1 0.000*** 0.913 0.113 0.388 0.005*** 0.404 0.009***
SSD 0.243 0.107 0.688 0.075* 0.815 0.005*** 0.805 0.000***
Belgium FSD 0.452 0.114 0.453 0.267 0.848 0.104 0.118 0.134
SSD 0.707 0.168 0.363 0.203 0.864 0.105 0.992 0.234
Denmark FSD 0.120 0.421 0.225 0.682 0.439 0.821 0.159 0.362
SSD 0.437 0.635 0.398 0.449 0.312 0.717 0.624 0.427
Finland FSD 0.139 0.215 0.227 0.271 0.038 0.195 0.128 0.126
SSD 0.477 0.194 0.828 0.166 0.367 0.208 0.429 0.178
France FSD 0.105 0.180 0.328 0.175 0.253 0.005*** 0.948 0.005***
SSD 0.267 0.103 0.227 0.132 0.268 0.036** 0.850 0.020**
Germany FSD 0.500 0.101 0.362 0.626 0.898 0.016** 0.519 0.183
SSD 0.878 0.117 0.927 0.239 0.847 0.011** 0.927 0.150
Ireland FSD 0.500 0.203 0.333 0.446 0.530 0.405 0.902 0.277
SSD 0.508 0.311 0.641 0.415 0.614 0.234 0.674 0.186
30
B/M E/P CE/P D/P

H 01 H 02 H 01 H 02 H 01 H 02 H 01 H 02
Italy FSD 0.288 0.198 0.828 0.543 0.919 0.163 0.889 0.493
SSD 0.186 1.000 0.582 0.624 0.692 0.060* 0.637 0.487
The Netherlands FSD 0.039** 0.003*** 0.328 0.162 0.000*** 0.000*** 0.888 0.041**
SSD 0.045** 0.318 0.280 0.170 0.033** 0.987 0.467 0.089*
Norway FSD 0.131 0.151 0.407 0.383 0.575 0.187 0.757 0.176
SSD 0.243 0.492 0.465 0.166 0.526 0.028** 0.386 0.160
Spain FSD 0.233 0.372 0.855 0.092* 0.388 0.166 0.573 0.036**
SSD 0.311 0.567 0.892 0.061** 0.408 0.391 0.963 0.074*
Sweden FSD 0.255 0.112 0.710 0.188 0.702 0.262 0.925 0.310
SSD 0.437 0.203 0.932 0.224 0.948 0.155 0.985 0.122
Switzerland FSD 0.060* 0.000*** 0.357 0.362 0.209 0.134 0.705 0.224
SSD 0.113 0.268 0.381 0.624 0.362 0.360 0.367 0.423
UK FSD 0.233 0.038 0.249 0.049** 0.280 0.044** 0.777 0.045
SSD 0.344 0.167 0.525 0.091* 0.332 0.072* 0.547 0.278
1. *, **, *** denote significance at the 10%, 5% and 1% levels, respectively.
31
for the sample period from January 2008 to December 2014.
B/M E/P CE/P D/P
H 01 H 02 H 01 H 02 H 01 H 02 H 01 H 02
Austria FSD 0.000***1 0.157 0.067* 0.391 0.066* 0.329 0.169 0.254
SSD 0.014** 0.778 0.092* 0.937 0.000*** 0.452 0.855 0.069*
Belgium FSD 0.000*** 0.270 0.127 0.171 0.163 0.254 0.343 0.333
SSD 0.026** 0.672 0.135 1.000 0.181 0.803 0.211 1.000
Denmark FSD 0.103 0.419 0.514 0.451 0.291 0.160 0.789 0.412
SSD 0.081* 0.433 0.233 0.761 0.338 0.643 0.456 0.681
Finland FSD 0.149 0.134 0.266 0.103 0.203 0.359 0.108 0.307
SSD 0.535 0.438 0.472 0.209 0.485 0.403 0.859 0.269
France FSD 0.000*** 0.000*** 0.000*** 0.106 0.082* 0.101 0.229 0.171
SSD 0.031** 0.985 0.045** 0.342 0.056* 0.471 0.208 0.603
Germany FSD 0.066* 0.253 0.304 0.126 0.208 0.203 0.080* 0.203
SSD 0.067* 0.373 0.127 0.415 0.135 0.231 0.071* 0.667
Ireland FSD 0.171 0.377 0.277 0.351 0.014** 0.015** 0.112 0.293
SSD 0.292 0.899 0.203 1.000 0.000*** 0.896 0.192 1.000
(continued)
32
B/M E/P CE/P D/P

H 01 H 02 H 01 H 02 H 01 H 02 H 01 H 02
Italy FSD 0.028** 0.176 0.014** 0.046** 0.128 0.239 0.218 0.234
SSD 0.028** 0.397 0.236 0.543 0.167 0.644 1.000 0.203
The Netherlands FSD 0.000*** 0.000*** 0.653 0.124 0.066* 0.014** 0.110 0.603
SSD 0.000*** 0.924 0.405 0.264 0.113 0.618 0.352 0.667
Norway FSD 0.176 0.106 0.125 0.317 0.136 0.479 0.264 0.253
SSD 0.441 0.313 0.208 0.403 0.620 0.368 0.418 0.545
Spain FSD 0.013** 0.043** 0.139 0.114 0.103 0.154 0.000*** 0.107
SSD 0.081* 0.652 0.164 0.456 0.194 0.507 0.000*** 0.361
Sweden FSD 0.027** 0.067* 0.070* 0.014** 0.508 0.164 0.641 0.385
SSD 0.147 0.361 0.181 0.417 0.288 0.352 0.351 0.333
Switzerland FSD 0.000*** 0.267 0.192 0.167 0.147 0.122 0.156 0.040**
SSD 0.000*** 0.284 0.148 0.338 0.106 0.460 0.833 0.043**
UK FSD 0.145 0.257 0.129 0.181 0.132 0.110 0.802 0.343
SSD 0.025** 0.873 0.176 0.571 0.264 0.616 0.768 0.315
1. *, **, *** denote significance at the 10%, 5% and 1% levels, respectively.
33
4.3 Discussion
This section is divided into three parts. The first part presents our main results
in European markets for the pre- and post-2008 financial crisis periods. The second
part shows how much an investor earns when adopting the value or growth strategy,
which serves as evidence that can reconfirm our SD results. The third part explains
why the value premium disappears or reverses during recent years.
Our findings for the pre-2008 financial crisis show that 12, 42, and 2 of 56
disappearance and reversal of the value premium, respectively; after 2008, however,
the percentages of the three counterparts are 3.6%, 66.1%, and 30.3% respectively.
It is obviously that the percentage of the disappearance of the value premium does not
drastically change in the two periods (from 75% to 66.1%). In the meantime, the
percentage of the value premium sharply decreases from 21.4% to 3.6%, while that of
the reversal of the value premium dramatically increases from 3.6% to 30.3%.
These results are first documented in the literature for the European markets and
meaningful for investors. So, how much an investor earns when adopting the value
or growth strategy is an interesting issue discussed in the next part.
Figures 3(a) and (b), for example, adopting value strategy with CE/P and D/P
indicators, show the time series of compounded returns results from rolling over an
invested $1 beginning in 1975 or 1989 through 2007 for the UK and Austria,
respectively. In addition, Figures 4(a) and (b), adopting growth strategy with B/M
and CE/P indicators, also display the time series of compounded returns results from
rolling over an invested $1 beginning in 2008 through 2014 for Italy and Ireland,
34
respectively.
This study also shows that investors can gain some profit when adopting the
value or growth strategy in their investments. A few interesting features are
evidenced in the two figures. First, Figure 3 indeed reconfirms our SD results for the
pre-2008 period; that is, value portfolios, including CE/P and D/P indicators,
apparently outperform growth portfolios in the UK and Austria, respectively. In
addition, the difference in the compounded returns between the value and growth
portfolios is striking. One dollar for the CE/P indicator, as shown in Figure 3(a),
would have grown to $555.80 in value portfolio compared to $91.82 in growth
portfolio. A similar phenomenon is also seen for the D/P indicator, shown in Figure
3(b). Second, Figure 4 also reconfirms our SD results after 2008 period; that is,
growth portfolio, including B/M and CE/P indicators, outperforms value portfolio in
Italy and Ireland, respectively. The profiting from compounding for various
indicators apparently supports the value premium or the reversal of the value premium
in the pre- and post-2008 financial crisis periods, respectively.
Most of the market-indicator observations of post-2008 period show that the
value premium disappears or reverses in this study, which is similar to some of the
previous literature. For example, Fama and French (1998) show that the value
premium, formed on B/M, E/P, and D/P ratios, disappears in Italy’s stock market prior
to 1996. Abhyankar et al. (2009) and Li et al. (2009) also show that value stocks do
not outperform growth stocks for European and US markets prior to 2003 and 2006,
respectively. Our results are similar to the literature documenting that some firm
anomalies have disappeared or reversed as well. Cochrane (1999), Horowitz et al.
(2000a, 2000b) and Gompers and Metrick (2001), for example, have found that the
35
size premium disappears in the US stock markets. Jiang and Yamada (2011) have
documented that there is a reversal of size effect in the Japanese stock market as well.
Based on the previous literature, there are several possible explanations for the
disappearance or reversal of market anomalies in the financial markets. The possible
explanations are discussed below.
First, Dimson and Marsh (1999) document that once an apparent anomaly, such
as the small firm premium, is disseminated, it often vanishes or goes into reverse.
They assert that small-cap investors experience Murphy’s Law. 16 Similarly,
Murphy’s Law may be also used to explain for the disappearance or the reversal of the
value premium.
Second, it is quite possible that as the investors have become aware of the value
anomalies, for example, higher B/M firms prices increase. Thus, their subsequent
average returns decline. Additionally, as mentioned in Horowtitz et al. (2000a), the
recent increase in passive indexation has given, for example, more weight to lower
E/P stocks at the expense of higher E/P stocks.17
Third, Gompers and Metrick (2001), Yamori and Mourdoukoutas (2003), and
Chung et al. (2016) have documented that the deregulation of the financial markets
has gradually made the financial markets more efficient in the US, Japan, and
Australia. The financial markets of EU also experienced a large regulatory structure
change during the last three decades. MiFID (Markets in Financial Instruments
Directive), for example, replaced the ISD (Investment Services Directive) and came
16. Murphy’s Law, sometimes summarized as “Bread always falls with the buttered side down”,
suggests that the return from trying to profit from a market anomaly will usually disappear or go
into reverse.
17. A highly popular fund, such as the Vanguard 500 Index Fund, has given more weight to the largest
capitalization or low E/P stocks at the expense of smaller or high E/P stocks in US markets during
recent years (http://www.thesimpledollar.com/the-chorus-of-voices-for-index-funds).
36
into force in 2008. It seeks to improve the competitiveness of EU financial markets
by creating a single market for investment services and activities, and ensuring a high
degree of harmonized protection for investors in financial instruments. In addition,
MiFID can contribute to deeper, more integrated and more liquid-financial markets
and also drive down costs for issuers, delivering better and cheaper services for
investors.
Fourth, Bodie et al. (2013) assert that the Internet has allowed enormous amount
of information to be made quickly and cheaply available to the public. Individual
investors can now acquire timely information and analyst reports that would have
been available only to portfolio managers a decade ago. It is a reasonable conjecture
that the advance of information technology causes information to be disseminated
more rapidly and to be more easily obtained by investors in the stock markets,
contributing to the efficiency gains.
Fifth, the deregulation of European markets post-2008 financial crisis periods,
such as the QE policy and negative interest rate which carry the sufficiency of money
into the stock markets. Furthermore, the value portfolios are difficult to find when
the value stock price goes high. The phenomenon can be explained that the
representative investors are more risk-averse post 2008 crisis, so funds flee risk value
stocks, as asserted by Fama and French (1995) and Lakonishok et al. (1994), and
switch funds to growth stocks, relatively safe stocks.
37
Figure 3: Compounded returns for the UK and Austria before 2008.
38
Figure 4: Compounded returns for Italy and Ireland after 2008.
39
5. Conclusions
Our findings for the pre-2008 financial crisis show that 12, 42, and 2 of 56
disappearance and reversal of the value premium, respectively; after 2008, however,
the percentages of the three counterparts are 3.6%, 66.1%, and 30.3% respectively.
It is obviously that over thirty (30.3%) percent observations go into reverse after the
2008 financial crisis, which is the first found and the main contribution in the
literature. Whether this regularity persists in the European markets is worth
continual concern. The possible explanations for the disappearance or reversal of
value premium may be related to Murphy’s Law, investors' awareness of the
anomalies, the asset allocation of mutual funds, advance in information technology
and the deregulation of the financial markets. In addition, this study also shows that
investors can gain some profit when adopting the value or growth strategy in their
investments. Furthermore, this study finds the deregulation of the economical
structural change in wealth and change the investor behaviors, become more risk
averse after the 2008.
In short, our findings show that the trend of the value premium in European stock
markets is similar to that of the calendar or size anomaly in some major markets in
recent years.
40
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Appendix
The LMW test is used to examine the stochastic dominance relation between the value
and growth portfolios for European countries.18 The stochastic dominance approach
compares the cumulative distribution functions of the two candidate portfolios (A and
B) at all points in the sample. Let FA (r ) and FB (r ) be the cumulative
distribution functions of the returns of A and B, respectively.
Define FA(1) (r )  FA (r ) and FB(1) (r )  FB (r ) .
r r
Let FA( J ) (r )   FA( J 1) (u )du , FB( J ) (r )   FB( J 1) (u )du , J = 1, 2 … .
 
The null hypothesis is that the cumulative distribution function of portfolio A

stochastically dominates the cumulative distribution function of portfolio B for the J th
order of stochastic dominance. The first order of stochastic dominance (J = 1)
invokes the assumption of non-satiation of investors. That is, investors are assumed
to prefer more to less. The second order (J = 2) only assumes that investors are risk
averse, which is still general, but more restrictive than the first order of stochastic
dominance. The hypotheses can be written as:
H 0 : FA( J ) (r )  FB( J ) (r ) for all r (i.e., A  J B ), H1 : FA( J ) (r )  FB( J ) (r ) for some r
(i.e., A  J B ), where  J indicates stochastic dominance at the J th

order. Let
rAi , rBi  : i  1,..., n be realizations of the returns of A and B.
The test statistic proposed by LMW is LMW

(J )
r

 sup n FÂ( J ) (r )  FˆB( J ) (r ) , (A1)
where the operator Fˆ

(J )
can be shown as:
n
1
FÂ( J ) (r )  
n( J  1)! i1
(r  rAi ) J 1 I (rAi  r ) , (A2)
n
1
FˆB( J ) (r )  
n( J  1)! i1
(r  rAi ) J 1 I (rBi  r ) , (A3)
where I () is the indicator function. Since the sub-sampling approach allows for
general dependence and for autocorrelation in the returns, LMW uses this approach to
18. The contents of LMW test in this section are slightly modified from the paper of Linton et al. (2005)
and Fong (2010).
48
compute the empirical p-values for testing the hypotheses. The LMW sub-sampling
method requires computing n  b  1 times the following test statistic for a
sub-sample of size b given the data sample.
(J )
r
 
LMW k  sup b FÂ(,Jk) (r )  FˆB(,Jk) (r ) for k  1,.., n  b  1 . (A4)
The empirical p̂ -values from the sub-sampling can be obtained as follows:

n b 1
1

(J ) (J )
pˆ  I ( LMW k  LMW  0) (A5)
n  b  1 k 1
We reject the null hypothesis at a significance level if p̂   (the level of
significance).
49

歐洲股票市場價值溢酬之研究：另類檢驗法

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歐洲股票市場價值溢酬之研究：另類檢驗法

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逢 甲 大 學

Value Premium in the European Stock Markets:

ii FCU-Thesis & Dissertations (2017)

This study uses an alternative method, stochastic dominance (SD) test, to

examine the value premium on the basis of book-to-market (B/M), earnings-to-price

major European markets, so a total of 56 market-indicator observations are formed.

found to be the existence, disappearance and reversal of the value premium,

in the literature. Whether this regularity persists in European markets is worth

iii FCU-Thesis & Dissertations (2017)

(CE/P)和股利市價比(D/P)，因此形成了總共 56 個市場指標觀察值。在 2008 年金

融危機之前的研究結果發現 56 個觀察值中有 12 個價值溢酬、42 個消失、2 個反

轉，分別佔 21.4%、75%和 3.6%。此次研究結果發現與 Fama 和 French (1998)，

Abhyankar et al. (2009)和 Li et al. (2009)有一致性的結果。然而，在 2008 年金融

海嘯之後，本文發現價值溢酬的結果有很大差異，在兩個時期 2008 前和 2008 後

的比較結果顯示，價值溢酬的存在從 21.4%急劇下降到 3.6%，而價值溢酬反轉

iv FCU-Thesis & Dissertations (2017)

2.2 Stochastic Dominance ..................................................................................................... 7

3. Data and Methodology ............................................................................................... 8

4.2 Empirical Results before and after 2008 ....................................................................... 27

4.3 Discussion ..................................................................................................................... 34

v FCU-Thesis & Dissertations (2017)

vi FCU-Thesis & Dissertations (2017)

vii FCU-Thesis & Dissertations (2017)

book-to-market (B/M), earnings-to-price (E/P), cash earnings-to-price (CE/P), or

dividend-to-price (D/P) dominate growth stocks with lower corresponding ratios.

(E/P), cash earnings-to-price (CE/P), or dividend-to-price (D/P) ratios yield higher

behavioral-based model is used. According to the risk-based model, the

higher-than-average returns for the value-growth strategy reflect a compensation for

offer investors relatively more-favorable returns than growth portfolios in developed

Zealand markets has become weak since the 2008 crisis.

various value-growth proxies to examine whether the return distribution of value

portfolio stochastically dominates that of a growth portfolio. Our statistical

be a compelling explanation for the superior performance of a value-growth

investment strategy (Seyhun, 1993).

articulated theory to explain the superior performance of the value-growth strategy.

of stochastic dominance for the recent period, after 2008.

underperform growth stock during poor worldwide economic conditions (Lakonishok

dominance approach, we finally reexamine the stochastic dominance relations

replacement to account for non i.i.d. (independently and identically distributed)

issue in return autocorrelation.2 We present the first-order stochastic dominance (FSD)

portfolios based on various value-growth proxies. While an FSD relationship of

over growth portfolios.

of the value premium, respectively. Comparing to our results which is consistent

literature. Whether this regularity persists is worth continual concern.3

The remainder of this thesis is structured as follows. Section 2 presents the

results are presented in Section 4, and Section 5 presents the conclusion.

2.1 Value Premium

book-to-market (B/M), earnings-to-price (E/P), cash earnings-to-price (CE/P), or

dividend-to-price (D/P) outperform growth stocks with lower corresponding ratios.

portfolios offer investors relatively more-favorable returns than growth portfolios in

Australian, Canadian, Japanese and some European markets, respectively.

premium was disappearing in US stock markets from 1982–97. In addition, Yamori

become weak lately.

each market. This study uses a comprehensive examination of value premium,

And value investing is the popular investment styles followed by professional

2.2 Stochastic Dominance

efficient market hypothesis.9 In addition, the disadvantage of the CAPM is that it

investor utility function.10 To avoid these argumentations as in the literature, this

study uses distribution-free analysis, namely, stochastic dominance (SD), to

of SD are briefly described in the following.

that investor utility functions must be concave.

There are several SD tests in the econometric literature. A new bootstrap-based

whether value stocks outperform growth stocks based on different value-growth

the sub-sampling bootstrap procedure to the sampled blocks of data without

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