Quality Minus Junk

AQR

Cliff Asness, Andrea Frazzini

Research

80 Pages

AQR Capital Management examines whether markets fully price company quality, arguing that profitable, growing, and safer businesses have historically generated stronger risk adjusted returns. The paper contends quality remains surprisingly underpriced, particularly after speculative periods like the internet bubble, challenging conventional asset pricing theory.

Key Takeaways

Quality Remains Mispriced: Quality alone explains only about 10% of cross sectional price variation, suggesting markets may underprice stronger businesses.
Global Return Premium: The QMJ factor produced positive returns in 23 of 24 countries while earning statistically significant 4 factor alphas across both U.S. and global samples.
Flight To Quality: Buying quality and shorting junk generated a 21.29% cumulative 5 year abnormal return in the U.S., with quality stocks tending to outperform during market stress.
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