The Value Uncertainty Premium

89 Pages Posted: 2 Jan 2019 Last revised: 29 Jul 2019

See all articles by Turan G. Bali

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

Luca Del Viva

ESADE Business School

Menna El Hefnawy

ESADE Business School; Ramon Llull University

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

This paper investigates whether the time-series volatility of book-to-market (BM), called value uncertainty (UNC), is priced in the cross-section of equity returns. A size- adjusted value-weighted factor with a long (short) position in high-UNC (low-UNC) stocks generates an annualized alpha of 6-8%. This value uncertainty premium is driven by outperformance of high-UNC firms and is not explained by established risk factors or firm characteristics, such as price and earnings momentum, investment, profitability, or BM itself. At the aggregate level, UNC is correlated with macroeconomic fundamentals and predicts future market returns and market volatility. We provide a rational asset- pricing explanation of the uncovered UNC premium.

Keywords: value stocks, book-to-market uncertainty, equity returns, asset pricing factors

JEL Classification: G11, G12

Suggested Citation

Bali, Turan G. and Del Viva, Luca and El Hefnawy, Menna and Trigeorgis, Lenos, The Value Uncertainty Premium (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 - Robert Emmett 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

ESADE Business School ( email )

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

Ramon Llull University ( email )

Avinguda de la Torre Blanca, 59
Sant Cugat del Vall├Ęs, 08172
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, 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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