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Value and Momentum Everywhere (2013)

Academic Research Review Factor Investing Cross-Asset

Robert Stowe, AAMS® Investment Advisor

This page reviews "Value and Momentum Everywhere," a 2013 paper by Clifford Asness, Tobias Moskowitz, and Lasse Heje Pedersen. The researchers found that buying cheap assets (value) and recent winners (momentum) produced statistically significant historical extra returns across eight different types of investments and multiple countries. Their work is one of the strongest cases that these patterns are real and widespread, not just a fluke in U.S. stock data.

Published in The Journal of Finance, the paper examines stocks in the U.S., U.K., continental Europe, and Japan, along with country stock indexes, government bonds, currencies, and commodities. The researchers found that value and momentum strategies were profitable in every category they studied, and that a shared underlying structure connects these extra returns across markets.

Key Findings

The paper's main contribution is showing that value and momentum premiums exist far beyond the U.S. stock market where they were first discovered. A pattern that shows up in only one market could be a coincidence. A pattern that shows up across eight different types of investments and four regions around the world is much harder to explain away.

Value and Momentum Premiums Across Markets

The researchers define value and momentum consistently across all investment types. For stocks, value means buying companies whose stock price is low relative to their book value (the company's net assets). Momentum means buying stocks that have risen over the past 12 months. For other investments, the researchers adapt these ideas: value in currencies uses purchasing power comparisons between countries, value in bonds uses real interest rates, and value in commodities uses the slope of futures prices.

In every investment type, buying the cheapest assets (value) and the recent winners (momentum) produced positive extra returns on average. The consistency of this finding is the paper's strongest result. These are not small effects; the extra returns are large enough to matter in a real portfolio.

Value and Momentum Move in Opposite Directions

One of the paper's most useful findings is that value and momentum returns tend to move in opposite directions. When value strategies do well, momentum strategies tend to struggle, and vice versa. This pattern held across all eight investment types the researchers studied.

This has a direct benefit for portfolio construction. The research suggests that the negative correlation between the two factors may provide a diversification benefit: when one side dips, the other tends to hold up. The researchers found that a balanced allocation between value and momentum historically produced higher Sharpe ratios (a measure that compares return to risk) than a single-factor approach.

A Shared Structure Across Markets

The paper found strong co-movement in value returns across investment types, and separately in momentum returns across investment types. When value works in stocks, it tends to work in bonds, currencies, and commodities at the same time. The same is true for momentum.

This co-movement suggests that a shared set of economic forces drives value and momentum returns across all markets. These patterns are not independent coincidences; they are connected. This finding points toward broad economic or investor-behavior explanations rather than stories specific to any one market.

Practical Implications

What This Means for Portfolio Design

The paper's most actionable finding is that combining value and momentum creates a more efficient portfolio than using either approach alone. Because they tend to move in opposite directions, the negative correlation between the two factors may provide a diversification benefit that reduces large losses and improves risk-adjusted returns. This held across every investment type the researchers studied.

For investors using factor-based strategies, the research suggests that a multi-factor approach is not just a way to capture more return sources; it is a risk management tool. A momentum-only portfolio carries significant crash risk. A value-only portfolio can underperform for years at a stretch (the "value winter" of 2018 to 2020 showed this in practice). Combining the two approaches helps protect against both risks.

Diversifying Across Investment Types

The shared factor structure documented in the paper suggests that investors get less diversification than they might expect from applying the same strategy (value or momentum) across multiple investment types. If value returns move together globally, a portfolio that bets on value in stocks, bonds, currencies, and commodities may see losses in all four areas at the same time during a value downturn.

The research suggests that real diversification comes from combining different strategies (value and momentum together) rather than applying the same strategy across different markets.

Why Timing Between Factors Is Difficult

Because value and momentum move in opposite directions, successfully switching between them requires predicting which one will do better in the near term. The paper's evidence suggests this relationship is driven by broad economic forces (the availability of credit, investor sentiment) that are themselves hard to predict.

The researchers concluded that a consistent allocation to both factors historically proved more robust than attempts at factor timing. This is consistent with the broader academic finding that capturing factor premiums requires patience and discipline, not active timing.

How the Researchers Tested This

Data and Time Period

The study uses data from 1972 to 2011, covering nearly four decades. This includes very different market environments: the 1970s inflation, the 1987 crash, the dot-com bubble, and the 2008 financial crisis. Testing across so many different conditions makes the findings more reliable.

The eight investment types include: individual stocks in four regions (U.S., U.K., continental Europe, Japan), stock index futures across 18 developed countries, government bond futures for 10 countries, 10 currency pairs versus the U.S. dollar, and 27 commodity futures. This breadth makes it one of the most comprehensive cross-asset studies in the academic literature.

How the Portfolios Were Built

For each investment type, the researchers ranked assets into three groups based on their value and momentum scores. The test portfolios bought the top group and sold (shorted) the bottom group. This approach isolates the factor premium from broad market moves, so the returns reflect only the value or momentum signal itself.

Each group was equally weighted and rebalanced monthly. The researchers reported raw returns, risk-adjusted returns (how much extra return remained after accounting for market exposure), and Sharpe ratios (return per unit of risk) for each factor in each investment type.

Why Do These Patterns Exist?

The paper evaluates two broad categories of explanation for why value and momentum premiums exist and persist. The answer matters because it determines whether these extra returns are likely to continue or will eventually disappear as more investors try to capture them.

Risk-Based Explanations

If cheap stocks earn higher returns because they are genuinely riskier, then the extra return is fair compensation for taking on that risk, and it should stick around even as more investors become aware of it. The classic argument here is that cheap stocks tend to be troubled companies with higher bankruptcy risk or greater sensitivity to economic downturns.

The researchers tested whether standard risk measures explain the cross-market premiums. They found that while returns do move together across investment types, existing risk models do not fully explain why. The shared pattern is real, but what drives it remains an open question.

Investor Behavior Explanations

Behavioral theories argue that value and momentum premiums come from predictable mistakes investors make when processing information. The leading explanation combines two biases: investors initially underreact to news (which creates momentum, as prices adjust slowly) and then overreact in the long run (which creates value opportunities, as prices overshoot).

The opposite relationship between value and momentum supports this interpretation. If investors are slow to react to good news, recent winners (momentum stocks) tend to become overpriced over time, making them look expensive on value measures. Recent losers tend to become cheap. The two factors capture different stages of the same pricing cycle.

Liquidity and Funding Stress

The paper also examines whether the availability of credit and capital in the financial system helps explain the pattern. The idea is that when funding dries up across markets, it can affect factor returns everywhere at the same time.

The researchers found partial support for this idea. Momentum crashes (sudden, severe momentum losses) tend to happen during periods of financial stress. Value strategies, on the other hand, tend to recover during those same periods. This difference helps explain why value and momentum move in opposite directions, and suggests that credit conditions play a role in connecting these premiums across markets.

Limitations and Caveats

Limitations to Consider

Trading costs not included: The paper reports returns before trading costs. In practice, momentum strategies require frequent buying and selling, which creates real costs that reduce returns, especially in less liquid markets.
Short selling may not be easy: The test portfolios assume you can freely bet against (short sell) any asset. In reality, many investors face restrictions on short selling, and the borrowing costs involved can eat into or eliminate the gains from the short side.
Momentum can crash: Momentum strategies sometimes experience sudden, severe losses, especially during sharp market reversals. The 2009 momentum crash, which falls within the study period, is a clear example of this risk.
One historical period: While nearly four decades of data is substantial, the study covers a specific era of falling interest rates and expanding global markets. Whether the results hold equally in a different economic environment is an open question.
"Value" means different things in different markets: For stocks, value is measured by comparing price to book value. For bonds, currencies, and commodities, the researchers used different measures. Whether these all capture the same underlying concept of "cheapness" is debatable.