Why Do Value Stocks Have More Consumption Risk?
42 Pages Posted: 1 Jan 2020
Date Written: November 27, 2019
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
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