A Comparison of Value and Growth Investment Strategies Using the Hidden Markov Model With Switching and the Kaplan-Meier Method
DOI:
https://doi.org/10.33119/ERFIN.2025.10.1.2Keywords:
Exchange-Traded Funds, Factor Investing, Factor Timing, Fund of Funds, Markov-Switching Autoregressive ModelAbstract
The value versus growth debate has persisted among practitioners and academics. Historically, value strategies outperformed growth and the overall market, but recently growth often exceeded both. This article assesses the performance of value and growth strategies from January 2013 to December 2024, using fund of funds portfolios constructed from the largest U.S. ETFs by assets under management. A hidden Markov model with switching identifies hidden states, while the Kaplan-Meier method, adapted from survival analysis, measures their persistence in days. The HMM is also used for factor timing. Results show that value recovers faster than growth after negative shocks, and the HMM-based timing strategy generates higher returns for a blended fund of funds containing both factors. These findings suggest a state-space model can help investors navigate market conditions by dynamically identifying low- and high-volatility periods and adjusting value and growth exposures.
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