This file presents the monthly return of the VPD factor in Cong, George, and Wang (2023), and it is constructed as follows:
Each month, stocks are independently sorted into 3 V/P (the ratio of the RIM-based intrinsic value to the price) portfolios and 2 size (market capitalization) portfolios. The three V/P portfolios are underpriced (top 30% V/P), neutral (middle 40% V/P), and overpriced (bottom 30% V/P) stocks, and the two size portfolios are small (bottom 50%) and big (top 50%) stocks. The VPD factorâ€™s return is defined as the average of the return difference of the underpriced and overpriced stocks within small and big groups of stocks.
A stock 's intrinsic value V is constructed from a 3-period residual income model while incorporating the forward-looking analysts' earnings forecasts (see Section 2 of Cong, George, and Wang (2023) for details). Our sample includes common stocks of non-financial firms in the intersection of I/B/E/S, CRSP, and COMPUSTAT datasets, and the cutoff points in V/P and size sorts are based on NYSE stocks.
Reference:
Cong, Lin William, Nathan Darden George, and Guojun Wang. "RIM-based value premium and factor pricing using value-price divergence." Journal of Banking & Finance 149 (2023): 106812.