The Value Uncertainty Premium
89 Pages Posted: 2 Jan 2019 Last revised: 29 Jul 2019
Date Written: December 11, 2018
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: Suggested Citation