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The Value Premium and Time-Varying Volatility

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  • Xiafei Li
  • Chris Brooks
  • Jo�lle Miffre

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. Copyright (c) 2009 The Authors Journal compilation (c) 2009 Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Business Finance & Accounting.

Volume (Year): 36 (2009-11)
Issue (Month): 9-10 ()
Pages: 1252-1272

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Handle: RePEc:bla:jbfnac:v:36:y:2009-11:i:9-10:p:1252-1272

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0306-686X

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Cited by:
  1. M. Eskandar Shah & Sourafel Girm & R. Hudson, 2012. "Rationalizing the Value Premium under Economic Fundamentals in an Emerging Market," Working Papers 12010, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
  2. Ebrahim, M. Shahid & Girma, Sourafel & Shah, M. Eskandar & Williams, Jonathan, 2014. "Rationalizing the value premium in emerging markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 51-70.
  3. Wu, Yuliang & Li, Youwei, 2011. "Long-term return reversals--Value and growth or tax? UK evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(3), pages 347-368, July.

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