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Value Uncertainty

Author

Listed:
  • Turan G. Bali

    (Department of Business Administration, McDonough School of Business, Georgetown University, Washington, DC 20057)

  • Luca Del Viva

    (Department of Economics, Finance and Accounting, ESADE Business School, Ramon Llull University, 08171 Barcelona, Spain)

  • Menatalla El Hefnawy

    (CUNEF Universidad, 28040 Madrid, Spain)

  • Lenos Trigeorgis

    (Department of Management, Durham University Business School, Durham DH1 3LB, United Kingdom)

Abstract

We examine how time-series volatility of book-to-market (UNC) is priced in equity returns and the relative contributions of its book volatility (variations in earnings and book value) and market volatility components (shocks in required return). UNC captures valuation risk, so stocks with high valuation risk earn higher return. An investment strategy long in high-UNC firms and short in low-UNC firms generates 8.5% annual risk-adjusted return. UNC valuation risk premium is driven by outperformance of high-UNC firms facing higher information risk and is not explained by established risk factors and firm characteristics.

Suggested Citation

  • Turan G. Bali & Luca Del Viva & Menatalla El Hefnawy & Lenos Trigeorgis, 2024. "Value Uncertainty," Management Science, INFORMS, vol. 70(7), pages 4548-4563, July.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:7:p:4548-4563
    DOI: 10.1287/mnsc.2023.4888
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