Articlegreen2009

The Value Premium and Time‐Varying Volatility

Xiafei Li · Chris Brooks · Joëlle Miffre

31 citations0/0 files storedJournal of Business Finance &amp Accounting

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Financial Markets and Investment Strategies Financial Analysis and Corporate Governance Financial Reporting and Valuation Research

Abstract

Abstract: Numerous studies have documented the failure of the static and conditional capital asset pricing models to explain the difference in returns between value and growth stocks. This paper examines the post‐1963 value premium by employing a model that captures the time‐varying total risk of the value‐minus‐growth portfolios. Our results show that the time‐series of value premia is strongly and positively correlated with its volatility. This conclusion is robust to the criterion used to sort stocks into value and growth portfolios and to the country under review (the US and the UK). Our paper is consistent with evidence on the possible role of idiosyncratic risk in explaining equity returns, and also with a separate strand of literature concerning the relative lack of reversibility of value firms' investment decisions.

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References

1993Common risk factors in the returns on stocks and bonds 1986Generalized autoregressive conditional heteroskedasticity 1982Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation 1964CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*1992The Cross-Section of Expected Stock Returns 1991Conditional Heteroskedasticity in Asset Returns: A New Approach 1993On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks 1975THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS**This paper is another in a series of interrelated theoretical and statistical studies of corporate financial and investment policies being made under grants from the Rockefeller Foundation, and more recently the Ford Foundation, to the Harvard Business School. The generous support for this work is most gratefully acknowledged. The author is also much indebted to his colleagues Professors Bishop, Christenson, Kahr, Raiffa, and (especially) Schlaifer, for extensive discussion and commentary on an earlier draft of this paper; but responsibility for any errors or imperfections remains strictly his own.[Professor Sharpe's paper, “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk” (Journal of Finance, September 1964) appeared after this paper was in final form and on its way to the printers. My first section, which parallels the first half of his paper (with corresponding conclusions), sets the algebraic framework for sections II, III and VI, (which have no counterpart in his paper) and for section IV on the equilibrium prices of risk assets, concerning which our results differ significantly for reasons which will be explored elsewhere. Sharpe does not take up the capital budgeting problem developed in section V below.]

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