Value Effect and Macroeconomic Risk

Posted: 27 Jul 2016

See all articles by Cathy Cao

Cathy Cao

Seattle University

Chongyang Chen

Pacific Lutheran University

Vinay T. Datar

Seattle University

Date Written: July 25, 2016

Abstract

We study to what extent macroeconomic risk drives the positive cross-sectional relation between future stock returns and relative firm value, such as book-to-market ratio and earnings-to-price ratio. We provide evidence that value stocks are risker than growth stocks. We show that value stocks have higher risk loadings than growth stocks on the growth rate of industrial production, the term premium, and the default premium. We also show that the risk loadings and risk premiums estimated with respect to Chen, Roll, and Ross [1986] factors account for more than half of the average return spreads between value portfolios and growth portfolios. Our evidence suggests that risk plays an important role in explaining the value effect. Our results provide implications to value and growth investment.

Keywords: macroeconomic risk, risk premium, risk factors, value effect

Suggested Citation

Cao, Cathy and Chen, Chognyang and Datar, Vinay T., Value Effect and Macroeconomic Risk (July 25, 2016). Available at SSRN: https://ssrn.com/abstract=2814312

Cathy Cao (Contact Author)

Seattle University ( email )

900 Broadway
Seattle, WA 98122
United States

Chognyang Chen

Pacific Lutheran University ( email )

South Garfield Street
Tacoma, WA 98112
United States

Vinay T. Datar

Seattle University ( email )

900 Broadway
Seattle, WA 98122
United States
206-296-2801 (Phone)
206-296-2486 (Fax)

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