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

Published online by Cambridge University Press:  01 February 2009

Hui Guo
College of Business Administration, University of Cincinnati, Cincinnati, OH 45221.
Robert Savickas
School of Business, George Washington University, 2023 G Street NW, Washington, DC 20052.
Zijun Wang
Private Enterprise Research Center, Texas A&M University, College Station, TX 77843.
Jian Yang
Business School, University of Colorado Denver, Denver, CO 80202.


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.

Research Articles
Copyright © Michael G. Foster School of Business, University of Washington 2009

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