• John Y. Campbell


March 23, 2023, Paper: "Value investing delivers volatile returns, with large draw-downs both in periods of strong stock market performance such as the technology boom of the late 1990s, and in stock market downturns such as the global financial crisis of 2008 and the Covid-19 pandemic of 2020. This paper interprets the returns to the standard value strategy through the lens of an inter-temporal CAPM. In this model, the shocks that move value returns include shocks to the expected cash flows of the aggregate stock market, shocks to the discount rates applied to those cash flows, and shocks to the variance of aggregate market returns. We document that these three shocks explain a large fraction (about 50%) of the quarterly returns to value investing over the last 60 years. In addition, the paper distinguishes the intra-industry and inter-industry components of the value strategy, and finds that average returns, ICAPM risk exposures, and the explanatory power of ICAPM shocks for portfolio returns are higher for the intra-industry component. Finally, we develop a methodology to perform the ICAPM decomposition at the daily frequency, which helps us explain the daily fluctuations in value returns during the Covid-19 pandemic period. We find that the ICAPM helps to explain the return to intra-industry value during this period, whereas inter-industry value appears to be driven in large part by industry-specific earning shocks attributable to the pandemic."