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The value-growth premium in a time-varying risk return framework

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  • Park, Keehwan
  • Jung, Mookwon
  • Fang, Zhongzheng

Abstract

In recent years, growth firms outperformed value firms, which led investors to doubt value strategy in their investments. Reworking the Euler equation shows that time-varying risk is responsible for the reverting risk-return relation from negativity contemporaneously to positivity with a time lag. The negative relation is due to the volatility feedback effect, while the positive relation is the risk premium effect. Because of the negative volatility feedback effect, growth firms outperform value firms, particularly in heightened stock market volatility, such as in the first year of the Covid-19 pandemic. However, we find value firms earn a higher average return than growth firms over long horizons.

Suggested Citation

  • Park, Keehwan & Jung, Mookwon & Fang, Zhongzheng, 2023. "The value-growth premium in a time-varying risk return framework," International Review of Economics & Finance, Elsevier, vol. 88(C), pages 1500-1512.
    • Handle: RePEc:eee:reveco:v:88:y:2023:i:c:p:1500-1512
    DOI: 10.1016/j.iref.2023.07.043
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    References listed on IDEAS

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    1. Kent Daniel & David Hirshleifer & Lin Sun, 2020. "Short- and Long-Horizon Behavioral Factors," The Review of Financial Studies, Society for Financial Studies, vol. 33(4), pages 1673-1736.
    2. William F. Sharpe, 1963. "A Simplified Model for Portfolio Analysis," Management Science, INFORMS, vol. 9(2), pages 277-293, January.
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    More about this item

    Keywords

    Time-varying risk effect; Long-run risk effect; Volatility feedback effect; Risk premium effect; Reverting risk and return relation; Distributed-lag model of oscillating dynamics;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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