Combining Value and Momentum Signals with Quality Filters in Long-Short S&P 500 and Stoxx Europe 600 Equity Portfolios

Details

Supervisors

Petitjean, Mikael ; Desagre, Christophe

Faculty

Louvain School of Management

Degree label

Master [120] : ingénieur de gestion, à finalité spécialisée

Abstract

enThis thesis explores whether combining Value and Momentum signals in long-short strategies improves risk-adjusted performance compared to each factor considered in isolation, and whether this benefit varies across market regimes, signal specifications and portfolio construction methods. Firstly, we established the theoretical foundations of the two factors. The literature shows that Value and Momentum each generate a persistent positive premium but are structurally negatively correlated, creating a potential for diversification which forms the central motivation of this work. Our methodology utilises the complete historical data of the S&P 500 constituents over more than thirty years, with replication on the Stoxx Europe 600, rigorous treatment of survivorship bias, explicit transaction costs, and several hundred composite scores evaluated under three variants of quality filters inspired by the F-Score of Piotroski. Our analyses show that the benefits of combining these strategies depend primarily on market conditions. Certain Momentum profiles geared towards mean reversion perform better during periods of crisis, whilst trend-following profiles dominate in bull markets. Combining the two factors manages to maintain a positive return even during downturns, mitigating the severe losses generated by Momentum when used on its own. Value metrics that are robust to accounting distortions linked to intangible assets, fundamental quality filters calibrated to an optimal level, and the neutralisation of sectoral biases at the composite score level are, moreover, the most productive drivers in the post-2000 large-cap environment. The European replication, meanwhile, reveals a complete reversal of the factor hierarchy between the two markets, confirmed over a common observation window, thereby enhancing our understanding of the geographical portability of these strategies. In conclusion, the Value-Momentum combination is not a risk-free diversification arbitrage: it requires each component to carry a positive net premium and for transaction costs to be kept under control. These results encourage practitioners to assess the market regime and the cost structure of its implementation before incorporating these factors into their long-short portfolios.