Vol. 19, No. 1, 2021
Jason D. Fink and Kristin E. Fink
While the outperformance of value relative to growth portfolios has been well established, there is still debate over whether this outperformance is the result of a systematic risk factor
or a behavioral tendency. The distinction is crucial to determining the expected returns of value- and growth-tilted portfolios. We ﬁnd that when idiosyncratic volatility—the key
arbitrage portfolio holding cost—increases, the outperformance of value correspondingly increases. Conversely, when idiosyncratic volatility is low, the outperformance is reduced.
This is consistent with a behavioral explanation and has important ramiﬁcations for the timing of value tilts employed by a portfolio manager.