Value Premium in the Chinese Stock Market: Free Lunch or Paid Lunch?
31 Pages Posted: 15 Aug 2011
Date Written: January 1, 2010
In this paper we examine the time-series predictability of the book-to-market (B/M) ratio for annual and monthly portfolio returns in the Chinese stock market. We find that value premiums exist throughout our sample period of 1998 to 2008. However, the predictability of B/M appears to be unrelated with financial distress risk. In fact, value stocks are less risky than growth stocks in terms of return volatility and estimated financial distress risk. Further, our results suggest that the factor VMG, which is directly related to value premium, is not a pervasive risk measure compared to market factor and SMB. While the size effect seems to be closely related to distress risk, both size and B/M factors not appear to be driven by financial distress risk.
Keywords: International asset pricing, value premium, financial distress risk
JEL Classification: G12, G15,
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