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

Author

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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.

Suggested Citation

  • Baltussen, Guido & Post, Gerrit T. & Van Vliet, Pim, 2012. "Downside risk aversion, fixed-income exposure, and the value premium puzzle," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3382-3398.
  • Handle: RePEc:eee:jbfina:v:36:y:2012:i:12:p:3382-3398
    DOI: 10.1016/j.jbankfin.2012.07.020
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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.

    More about this item

    Keywords

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

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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