This term paper deals with the strategy called “quality-minus-junk” (QMJ). The reader will see that both abnormal returns, characterized as alpha, and excess returns, characterized as returns above the risk-free rate, are consistently high for any of the three major asset-pricing models.
This particular thesis is going to go through the main findings and observations that Asness, Frazzini and Pedersen have made in their research on the QMJ factor and is also going to extend on some further examination of QMJ. The upcoming chapter briefly discusses the reason behind using the Gordon Growth Model as the basis of the quality score and the four main quality measures which were used in the design of the QMJ strategy. Chapters 3, 4 and 5 retest the findings by using three years of additional data and its most recent updates in May 2015. In Chapter 3 are tests which were performed for different levels of quality. Chapter 4 will focus on the role of the QMJ factor in pricing other risk factors and Chapter 5 analyzes QMJ for different economic environments. Therefore new aspects will be added to the analysis. In Chapter 6 the readers will see how the QMJ strategy has performed during different levels of the sentiment index and the last Chapter deals with the Q-factor model to see how well it explains the QMJ factor performance.
There are three main questions that are pursued and dealt with in this thesis. 1. What has changed in terms of the main findings for the QMJ strategy with the new and updated data? 2. The price of quality and the premium paid for higher quality constantly changes, especially for different market cycles and environments. It would therefore be interesting to see what one of the most popular measures of market sentiment, the sentiment-index by Baker and Wurgler, can tell us about the QMJ factor and vice versa. And the last question: Is there any potential relation between the two?
Inhaltsverzeichnis (Table of Contents)
- Introduction
- Quality Measures and the Gordon Growth Model
- Performance of Quality based on 10 Quality-ranked Portfolios
- The pricing of HML, SMB and UMD
- The QMJ factor and different economic environments
- QMJ and the Sentiment Index
- QMJ and the Q-factor Model
- Conclusion
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This thesis aims to investigate the "quality-minus-junk" (QMJ) strategy, which involves investing in high-quality stocks and shorting low-quality stocks. The study builds upon the work of Asness et al. (2014) who demonstrated the persistence of quality characteristics and their positive correlation with stock prices. The paper also seeks to explore the relationship between QMJ and various economic environments, market sentiment, and the Q-factor model.
- The performance of the QMJ strategy and its robustness over time.
- The relationship between the QMJ factor and different economic environments.
- The connection between the QMJ factor and market sentiment, as measured by the Sentiment Index by Baker and Wurgler (2006).
- The ability of the Q-factor model to explain the QMJ factor performance.
- The implications of the QMJ strategy for investors and asset pricing models.
Zusammenfassung der Kapitel (Chapter Summaries)
- Introduction: The chapter introduces the concept of the QMJ strategy and its theoretical foundation. It highlights the key findings of Asness et al. (2014) and outlines the research questions that will be addressed in the thesis.
- Quality Measures and the Gordon Growth Model: This chapter discusses the theoretical basis for the QMJ strategy, emphasizing the use of the Gordon Growth Model to define and measure stock quality. It explains how the model is used to determine the price of a security based on its characteristics.
- Performance of Quality based on 10 Quality-ranked Portfolios: This chapter examines the performance of the QMJ strategy by analyzing the returns of portfolios ranked by quality. It investigates the relationship between quality scores and stock prices.
- The pricing of HML, SMB and UMD: This chapter explores the role of the QMJ factor in the pricing of other risk-model factors, such as value (HML), size (SMB), and momentum (UMD).
- The QMJ factor and different economic environments: This chapter investigates how the QMJ strategy performs in different economic environments. It explores the relationship between the QMJ factor and macroeconomic variables.
- QMJ and the Sentiment Index: This chapter examines the connection between the QMJ strategy and market sentiment. It analyzes the performance of the QMJ factor during periods of high and low market sentiment.
Schlüsselwörter (Keywords)
The key concepts and terms explored in this thesis include "quality-minus-junk" (QMJ) strategy, Gordon Growth Model, quality measures, risk-adjusted returns, asset pricing models, market sentiment, Sentiment Index, Q-factor model, economic environments, and empirical research.
- Quote paper
- Mark Matern (Author), 2015, An Analysis of “Quality Minus Junk” Strategies. The Asset Pricing Factor, Munich, GRIN Verlag, https://www.grin.com/document/372144
