Essays On The Value Premium
Dewidar, Omar Aly
Date: 29 November 2013
Publisher
University of Exeter
Degree Title
PhD in Finance
Abstract
Value premium, which is the return difference between value and growth stocks, is one of the most important asset pricing anomalies. Value stocks tend to have more returns than growth stocks. And though, researchers agree about the existence of value premium, they tend to disagree about the reasons behind it. There are three main ...
Value premium, which is the return difference between value and growth stocks, is one of the most important asset pricing anomalies. Value stocks tend to have more returns than growth stocks. And though, researchers agree about the existence of value premium, they tend to disagree about the reasons behind it. There are three main explanations of the value premium. Firstly, value premium is a compensation for risk. This risk is captured systematically by asset pricing models, raised by firm characteristics or measured through business cycle phases. Secondly, value premium is a result of misspricing caused by investors’ behaviour. Finally, value premium is not an anomaly at all, it is a result of data bias.
The unsettled debate around value premium shows the need for more re- search into this problem. This study is different from previous work in several important areas. Firstly, the period of study is divided into two subperiods, the pre-1992 and the post-1992 period. This division will (i) reduce the effect of the missing data: and (ii) test the efficent market hypothesis, where the value premium becomes more known. Secondly, the risk of value and growth stocks is really tested by comparing their risk at the same level of returns. Thirdly, the reaction to earnings surprises around the quarterly returns in- stead of yearly returns is investigated. Finally, whether optimized value and growth portfolios can produce more returns than equal weighted ones is tested.
I find that: (i) value premium is significant for the pre-1992 and post-1992 periods alike. But after controlling for size, value premium exists only for the smallest size quintile; (ii) the January effect causes the value premium for the smallest size quintile in the post-1992 period but not on the pre-1992 period; (iii) Fama and French’s three factor model fails to explain the returns of the small size portfolios in the post-1992 period; (iv) value premium is not an effect of worsening conditions of the business cycle; (v) value stocks are riskier than growth stocks, but this is not the cause of value premium. Growth stocks have more returns than value stocks at the same levels of risk; (vi) analysts are more optimistic about value stocks but this is not the cause of value premium. Growth stocks are more affected by negative earnings surprise than value stocks; finally, (vii) the optimised value and growth portfolios can produce more out of sample returns than the equally weighted ones regardless of the length of the estimation period.
Doctoral Theses
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