Small Cap and Value Investing Offer both High Returns and a Hedge

Abstract

Recent evidence shows that low book-to-market portfolios (value) tend to perform better than high book-to-market portfolios (growth). This article investigates the performance of portfolios sorted by size and book-to-market during the periods when the stock market declined and when the economy is in recession. The results reveal that value investment did not do as well as growth investment in the bull markets but surpassed the growth portfolios during bear markets. Value investment beat growth investment in non-recessionary and recessionary periods and thus acted as a hedge during recessions.