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An exploration of the value and momentum interaction
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posted on 27.02.2017by Castaneda Vidal, Marcelo Alexis
This thesis explores the interaction between value and momentum from both a linear and nonlinear perspective. A statistical approach was proposed in order to capture either the linearity and nonlinearity interaction between value and momentum in the Carhart four - factor model. This was achieved by using generalised additive models and adjusting the slopes of HML and WML by their marginal effects. It was found that value (HML) and momentum (WML) strategies interact, extending upon the work of Asness (1997) and confirming the rationale proposed by Kenneth French (2003) on
value and momentum interactions. Yet, evidence was found suggesting that the noninear value and momentum interaction appears to be strongest amongst small market capitalisation stocks.