The Value Premium and Time-Varying Volatility
Journal of Business Finance and Accounting, 2009, 36, 9-10, 1252–1272
26 Pages Posted: 2 May 2007 Last revised: 10 Nov 2015
Date Written: March 13, 2009
Numerous studies have documented the failure of the static and conditional capital asset pricing models to explain the difference in returns between value and growth stocks. This paper examines the post-1963 value premium by employing a model that captures the time-varying total risk of the value-minus-growth portfolios. Our results show that the time-series of value premia is strongly and positively correlated with its volatility. This conclusion is robust to the criterion used to sort stocks into value and growth portfolios and to the country under review (U.S. and U.K.). Our paper therefore adds to the weight of evidence on the possible role of idiosyncratic risk in explaining equity returns.
Keywords: Value premium, CAPM, GJR-GARCH(1,1)-M, Conditional unsystematic risk
JEL Classification: G12, G14
Suggested Citation: Suggested Citation