The Value Premium
Posted: 2 Jan 2004
The value anomaly arises naturally within the neoclassic, rational expectations framework with competitive equilibrium. Costly reversibility and countercyclical price of risk cause assets in place to be much harder to adjust downward, and hence riskier, than growth options, especially in bad times when the price of risk is high. By linking risk and expected return to economic primitives, such as tastes and technology, the model generates many empirical regularities in the cross-section of returns; it also yields a rich array of new refutable hypotheses that can provide fresh directions for future empirical research.
Keywords: The Value Premium, Corporate Investment, Assets-in-Place, Growth Option, Costly Reversibility, Rational Expectations Economics
JEL Classification: G1
Suggested Citation: Suggested Citation