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Value Uncertainty

Georgetown McDonough School of Business Research Paper No. 3299582

91 Pages Posted: 2 Jan 2019 Last revised: 5 Oct 2020

See all articles by Turan G. Bali

Turan G. Bali

Georgetown University - McDonough School of Business

Luca Del Viva

ESADE Business School

Menna El Hefnawy

Universidad Complutense de Madrid (UCM) - Colegio Universitario de Estudios Financieros (CUNEF)

Lenos Trigeorgis

University of Cyprus - Department of Public and Business Administration; King’s College London; Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: December 11, 2018

Abstract

We investigate whether time-series volatility in book-to-market (UNC) is priced in equity returns. UNC captures uncertainty about the current value of the firm's portfolio of assets-in-place and real options, and reflects changes in moneyness and uncertainty in the exercise of these options. UNC is also associated with information risk, firm inflexibility, and investment volatility and commands a positive premium. An investment strategy long in high-UNC and short in low-UNC firms generates 13% annual risk-adjusted return. UNC premium is driven by outperformance of high-UNC (inflexible) firms facing higher information risk and is not explained by established risk factors and firm characteristics.

Keywords: Real Options, value stocks, book-to-market uncertainty, equity returns

JEL Classification: G11, G12

Suggested Citation

Bali, Turan G. and Del Viva, Luca and El Hefnawy, Menna and Trigeorgis, Lenos, Value Uncertainty (December 11, 2018). Georgetown McDonough School of Business Research Paper No. 3299582, Available at SSRN: https://ssrn.com/abstract=3299582 or http://dx.doi.org/10.2139/ssrn.3299582

Turan G. Bali

Georgetown University - McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: https://sites.google.com/a/georgetown.edu/turan-bali

Luca Del Viva (Contact Author)

ESADE Business School ( email )

Av. de Pedralbes, 60-62
Barcelona, 08034
Spain

Menna El Hefnawy

Universidad Complutense de Madrid (UCM) - Colegio Universitario de Estudios Financieros (CUNEF) ( email )

Calle de Leonardo Prieto Castro, 2
Madrid, Madrid 28004
Spain

Lenos Trigeorgis

University of Cyprus - Department of Public and Business Administration ( email )

75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
Cyprus
00357 2 338762 (Phone)
00357 2 339063 (Fax)

King’s College London ( email )

Strand
London, England WC2R 2LS
United Kingdom

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Ave. E62-663
Cambridge, MA 02142
United States

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