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Volatility risk and the value premium: Evidence from the French stock market

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  • Arisoy, Yakup Eser

Abstract

This paper documents that systematic volatility risk is an important factor that drives the value premium observed in the French stock market. Using returns on at-the-money straddles written on the CAC 40 index as a proxy for systematic volatility risk, I document significant differences between volatility factor loadings of value and growth stocks. Furthermore, when markets are classified into expected booms and recessions, volatility factor loadings are also time-varying. When expected market risk premium is above its average, i.e. during expected recessions, value stocks are seen riskier than their growth counterparts. This implies in bad times, investors shift their preferences away from value firms. Instead they use growth stocks as hedges against deteriorations in their wealth during those times. The findings are in line with the predictions of rational asset pricing theory and support a "flight-to-quality" explanation.

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  • Arisoy, Yakup Eser, 2010. "Volatility risk and the value premium: Evidence from the French stock market," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 975-983, May.
    • Handle: RePEc:eee:jbfina:v:34:y:2010:i:5:p:975-983
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    3. Konstantinidi, Eirini & Skiadopoulos, George, 2016. "How does the market variance risk premium vary over time? Evidence from S&P 500 variance swap investment returns," Journal of Banking & Finance, Elsevier, vol. 62(C), pages 62-75.
    4. Adcock, Christopher & Bessler, Wolfgang & Conlon, Thomas, 2022. "Characteristic-sorted portfolios and macroeconomic risks—An orthogonal decomposition," Journal of Empirical Finance, Elsevier, vol. 65(C), pages 24-50.
    5. Nidhal Mgadmi & Khemaies Bougatef, 2017. "Modeling volatility of the French stock market," Economics Bulletin, AccessEcon, vol. 37(2), pages 988-998.
    6. Walkshäusl, Christian, 2015. "Equity financing activities and European value-growth returns," Journal of Banking & Finance, Elsevier, vol. 57(C), pages 27-40.
    7. Aggarwal, Raj & Goodell, John W., 2011. "International variations in expected equity premia: Role of financial architecture and governance," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 3090-3100, November.
    8. Huij, Joop & Derwall, Jeroen, 2011. "Global equity fund performance, portfolio concentration, and the fundamental law of active management," Journal of Banking & Finance, Elsevier, vol. 35(1), pages 155-165, January.
    9. Shrikant P. Jategaonkar & Linda M. Lovata & Xiaoxiao Song, 2023. "Growth opportunities and earnings management by cross-listed and U.S. firms," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 47(1), pages 157-183, March.
    10. Konstantinidi, Eirini & Skiadopoulos, George, 2016. "How does the market variance risk premium vary over time? Evidence from S&P 500 variance swap investment returns," Journal of Banking & Finance, Elsevier, vol. 62(C), pages 62-75.
    11. M. Eskandar Shah & Sourafel Girm & R. Hudson, 2012. "Rationalizing the Value Premium under Economic Fundamentals in an Emerging Market," Working Papers 12010, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).

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