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Downside risk aversion, fixed-income exposure, and the value premium puzzle

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  • Baltussen, Guido
  • Post, Gerrit T.
  • Van Vliet, Pim

Abstract

The value premium is relatively small for investors with a material fixed-income exposure, such as insurance companies and pension funds, especially when they are downside-risk-averse. Value stocks are less attractive to these investors because they offer a relatively poor hedge against poor bond returns. This result arises for plausible, medium-term evaluation horizons of around one year. Our findings cast doubt on the practical relevance of the value premium for these investors and reiterate the importance of the choice of the relevant test portfolio, risk measure and investment horizon in empirical tests of market portfolio efficiency.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 36 (2012)
Issue (Month): 12 ()
Pages: 3382-3398

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Handle: RePEc:eee:jbfina:v:36:y:2012:i:12:p:3382-3398

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Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: Downside risk; Fixed income; Investment horizon; Value premium; Asset pricing;

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Cited by:
  1. Cumova, Denisa & Nawrocki, David, 2014. "Portfolio optimization in an upside potential and downside risk framework," Journal of Economics and Business, Elsevier, vol. 71(C), pages 68-89.

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