When do Value Stocks Outperform Growth Stocks? Investor Sentiment and Equity Style Rotation Strategies

Abstract

This paper investigates a relation between investor sentiment and performance of value stocks over growth stocks. To measure noise investors' sentiment, we use gauges: the CBOE equity put-call ratio and the market volatility (VIX) index. We find that value stocks tend to outperform growth stocks when the CBOE equity put-call ratio is relatively low or the VIX is relatively high. When the put-call ratio is relatively high or the VIX is relatively low, however, growth stocks marginally outperform or perform as well as value stocks. This finding suggests that the return premium of value stocks over growth stocks is at least partially influenced by investor sentiment. A strategy that switches equity styles on the basis of the put-call ratio seems to beat the benchmarks.