Why Do Value Stocks Have More Consumption Risk?

42 Pages Posted: 1 Jan 2020

See all articles by Yunhao He

Yunhao He

University of Zurich; Swiss Finance Institute

Date Written: November 27, 2019

Abstract

I build a production-based continuous-time equilibrium model with Markov regime switches. The model is solved in closed-form and endogenously generates the following previously documented patterns: (1) Value stocks yield larger returns than growth stocks that cannot be reconciled by CAPM; (2) The cash-flows of value stocks are more exposed to consumption risk than those of growth stocks; (3) The volatility of cash-flows of value stocks are more exposed to consumption volatility than that of growth stocks; (4) The returns of value stocks have larger beta on consumption volatility than growth stocks. Business cycle risk and costly reversibility provides a plausible explanation of those patterns.

Keywords: asset pricing, value premium, long-run risk, real investment

JEL Classification: G12, G17, E2, E44

Suggested Citation

He, Yunhao, Why Do Value Stocks Have More Consumption Risk? (November 27, 2019). Available at SSRN: https://ssrn.com/abstract=3493784 or http://dx.doi.org/10.2139/ssrn.3493784

Yunhao He (Contact Author)

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
45
Abstract Views
351
PlumX Metrics