The Critical Role of Conditioning Information in Determining if Value is Really Riskier than Growth

Cooper, Michael J.; Gubellini, Stefano

doi:10.2139/ssrn.1107528

Cited by 9 publications

(6 citation statements)

References 88 publications

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“…This approach is potentially problematic because Welch and Goyal (2008) and Paye (2012) show that many of these variables have rather weak predictive power for stock market returns and stock market variance, respectively. In addition, Ghysels (1998), Harvey (2001), and Cooper and Gubellini (2011) have cautioned that the estimation of conditional factor models can be sensitive to the choice of state variables. To address these issues, we identify the most relevant state variables from a comprehensive pool via a formal exhaustive variable selection procedure.…”

Section: Introductionmentioning

confidence: 99%

Time-Varying Beta and the Value Premium

Guo¹,

Wu²,

Yu³

2017

J. Financ. Quant. Anal.

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We model conditional market beta and alpha as flexible functions of state variables identified via a formal variable-selection procedure. In the post-1963 sample, the beta of the value premium comoves strongly with unemployment, inflation, and the price–earnings ratio in a countercyclical manner. We also uncover a novel nonlinear dependence of alpha on business conditions: It falls sharply and even becomes negative during severe economic downturns but is positive and flat otherwise. The conditional capital asset pricing model (CAPM) performs better than the unconditional CAPM, but this does not fully explain the value premium. Our findings are consistent with a conditional CAPM with rare disasters.

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Section: Introductionmentioning

confidence: 99%

Time-Varying Beta and the Value Premium

Guo¹,

Wu²,

Yu³

2017

J. Financ. Quant. Anal.

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“…For instance, Petkova and Zhang (2005) argue that the expected market risk premium, not the realized market excess return, should be used to define the state of the economy. However, Cooper and Gubellini (2011) show that the inferences made by Petkova and Zhang (2005) are very sensitive to the choice of conditioning variables used to estimate the expected market risk premium.…”

Section: B Factor Returns and Future States Of The Economy I Definimentioning

confidence: 99%

The q‐Factors and Macroeconomic Conditions: Asymmetric Effects of the Business Cycles on Long and Short Sides*

et al. 2018

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We examine whether the q-factors-the investment factor (INV) and the return-on-equity factor (ROE)-are related to the macroeconomy. We find reliable evidence that returns on INV are positively related to future economic growth. When conditioning on good and bad states of the business cycle, we show that returns on INV are significantly higher during good states than bad states. We also find that the conditioning effect of economic conditions on INV is asymmetric between long and short sides of INV. On the other hand, we find that returns on ROE are negatively associated with future aggregate earnings change. The relations remain robust even in the presence of business cycle variables and after controlling for the book-tomarket effect. JEL Codes: G12

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“…The survey questions concern primarily three broad areas: personal finances, business conditions, and buying conditions of consumers statistically designed to be representative of all American households . According to Cooper and Gubellini (), the index serves as an indicator of the future state of the overall economy. Thus, we use SentMi as a proxy for the sentiment for the business cycle.…”

Section: Datamentioning

confidence: 99%

Investor Sentiment and Credit Default Swap Spreads During the Global Financial Crisis

Lee

Kim

Park

2016

Journal of Futures Markets

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This paper examines whether investor sentiment can predict credit default swap (CDS) spread changes. Among several proxies for investor sentiment, change in equity put–call ratio performs best in predicting variation in CDS spread changes in both firm‐ and portfolio‐level regressions; in particular, the explanatory power of this proxy is greater for non‐investment‐grade firms than for investment‐grade firms. More importantly, sentiment may be a critical factor in determining CDS spread changes during the global financial crisis and may best explain the differences in CDS spread in the group of firms whose leverage ratio and stock volatility are highest. © 2016 Wiley Periodicals, Inc. Jrl Fut Mark 37:660–688, 2017

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The Critical Role of Conditioning Information in Determining if Value is Really Riskier than Growth

Cited by 9 publications

References 88 publications

Time-Varying Beta and the Value Premium

Time-Varying Beta and the Value Premium

The q‐Factors and Macroeconomic Conditions: Asymmetric Effects of the Business Cycles on Long and Short Sides*

Investor Sentiment and Credit Default Swap Spreads During the Global Financial Crisis

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