Is the Value Premium a Proxy for Time-Varying Investment Opportunities: Some Time Series Evidence

Journal of Financial and Quantitative Analysis, Forthcoming

51 Pages Posted: 24 Oct 2006

See all articles by Hui Guo

Hui Guo

University of Cincinnati - Department of Finance - Real Estate

Zijun Wang

Texas A&M University

Robert Savickas

George Washington University - School of Business - Department of Finance

Jian Yang

University of Colorado at Denver - Business School

Abstract

We uncover a positive stock market risk-return tradeoff after controlling for the covariance of market returns with the value premium. Fama and French (1996) conjecture that the value premium proxies for investment opportunities; therefore, by ignoring it, early specifications suffer from an omitted variable problem that causes a downward bias in the risk-return tradeoff estimation. We also document a positive relation between the value premium and its conditional variance, and the estimated conditional value premium is strongly countercyclical. The latter evidence supports the view that value is riskier than growth in bad times, when the price of risk is high.

Keywords: ICAPM, value premium, stock return predictability, realized variance, and GARCH

JEL Classification: G1

Suggested Citation

Guo, Hui and Wang, Zijun and Savickas, Robert and Yang, Jian, Is the Value Premium a Proxy for Time-Varying Investment Opportunities: Some Time Series Evidence. Journal of Financial and Quantitative Analysis, Forthcoming, Available at SSRN: https://ssrn.com/abstract=939800 or http://dx.doi.org/10.2139/ssrn.939800

Hui Guo (Contact Author)

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business
418 Carl H. Lindner Hall
Cincinnati, OH 45221
United States
513.556.7077 (Phone)
513.556.0979 (Fax)

HOME PAGE: http://homepages.uc.edu/~guohu/

Zijun Wang

Texas A&M University ( email )

Langford Building A
798 Ross St.
College Station, TX 77843-3137
United States

Robert Savickas

George Washington University - School of Business - Department of Finance ( email )

Funger Hall, Suite 501R
2201 G Street, N.W.
Washington, DC 20052
United States
202-994-8936 (Phone)
202-994-5014 (Fax)

HOME PAGE: http://savickas.net/

Jian Yang

University of Colorado at Denver - Business School ( email )

1250 14th St.
Denver, CO 80204
United States

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