CONTRARIAN INVESTMENT 307other than the twenty-five worst, the one hundred and twenty-two positive
months other than the twenty-five best, and the twenty-five best months in
the sample. The average difference in returns between value and glamour
portfolios for each state is also reported along with t-statistics for the test
that the difference of returns is equal to zero. The results in this table are
fairly clear. Using both the B/M and (C/P, GS) classification schemes, the
value portfolio outperformed the glamour portfolio in the market’s worst
twenty-five months. For example, using the (C/P, GS) classification, the
value portfolio lost an average of 8.6 percent of its value in the worst
twenty-five months, whereas the glamour portfolio lost 10.3 percent of
itsvalue. Similarly, using both classification schemes, the value portfolio on
average outperformed the glamour portfolio and the index in the next
worst eighty-eight months in which the index declined. Using the (C/P, GS)
classification, the value portfolio lost 1.5 percent in these months when the
index experiences a mild decline, compared to 2.9 percent for the glamour
portfolio and 2.3 percent for the index itself. So the value strategy did bet-
ter when the market fell. The value strategy performed most closely to the
glamour strategy in the one hundred and twenty-two positive months other
than the best twenty-five. In the very best months, the value strategy sub-
stantially outperformed the glamour strategy and the index, but not by as
much as it does when the market fell sharply. Some care should be taken
in interpreting these mean differences for the positive market return
months, however, given the low t-statistics. Overall, the value strategy per-
formed somewhat better than the glamour strategy in all states and signif-
icantly better in some states. If anything, the superior performance of the
value strategy was skewed toward negative market return months rather
than positive market return months. The evidence in table 8.7, Panel 1
thus indicates that the value strategy did not expose investors to greater
downside risk.
Table 8.7, Panel 2 provides numbers analogous to those in Panel 1 except
now the states of the world are realizations of real GNP growth.^16 The data
are quarterly, so that we have eighty-eight quarters in the sample. These
quarters are classified into four states of the world; the worst ten quarters,
the next worst thirty-four quarters, the best ten quarters, and the next best
thirty-four quarters. The quarterly returns on the various glamour and
value portfolios are then matched up with the changes in real GNP for one
quarter ahead, since evidence indicates that the stock market leads GNP by
approximately one quarter. Average quarterly returns for each portfolio are
then computed for each state.
The results in Panel 2 mirror the basic conclusions from Panel 1; namely,
the value strategy has not been fundamentally riskier than the glamour
(^16) In an earlier draft of this article we included results using the change in the unemploy-
ment rate. The results are quite similar to those for GNP growth.