The Critical Role of Conditioning Information in Determining if Value is Really Riskier than Growth
38 Pages Posted: 26 Mar 2008 Last revised: 25 Oct 2010
Date Written: September 12, 2010
Conditional asset pricing models have been used to determine whether the value premium and other CAPM anomalies are due to risk. We show that the conclusions on whether these anomalies are due to risk are very sensitive to the choice of the state variables used to define good and bad states of the world. We use a conditional CAPM framework allowing for alternative sets of plausible conditioning information and find that value appears to be riskier than growth in only about ten to twenty percent of specifications. We find even less evidence that size, issuance, momentum, and asset growth portfolio returns are due to risk. Overall, our results suggest that common CAPM anomalies are not due to risk.
Keywords: Asset Pricing, Conditional CAPM, Value Strategies
JEL Classification: G12
Suggested Citation: Suggested Citation