Value Uncertainty

Turan G. Bali; L. Del Viva; Menatalla El Hefnawy; Lenos Trigeorgis

doi:10.1287/mnsc.2023.4888

Value Uncertainty

Turan G. Bali
, L. Del Viva^*
, Menatalla El Hefnawy
, Lenos Trigeorgis

^*Corresponding author for this work

Research output: Indexed journal article › Article › peer-review

1 Citation (Scopus)

Abstract

We examine how time-series volatility of book-to-market (UNC) is priced in equity returns and the relative contributions of its book volatility (variations in earnings and book value) and market volatility components (shocks in required return). UNC captures valuation risk, so stocks with high valuation risk earn higher return. An investment strategy long in high-UNC firms and short in low-UNC firms generates 8.5% annual risk-adjusted return. UNC valuation risk premium is driven by outperformance of high-UNC firms facing higher information risk and is not explained by established risk factors and firm characteristics.

Original language	English
Pages (from-to)	4548-4563
Number of pages	16
Journal	Management Science
Volume	70
Issue number	7
DOIs	https://doi.org/10.1287/mnsc.2023.4888
Publication status	Published - Jul 2024

Keywords

book-to-market
equity returns
uncertainty
valuation risk

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@article{a421b59bdd874386a9941b090368abed,

title = "Value Uncertainty",

abstract = "We examine how time-series volatility of book-to-market (UNC) is priced in equity returns and the relative contributions of its book volatility (variations in earnings and book value) and market volatility components (shocks in required return). UNC captures valuation risk, so stocks with high valuation risk earn higher return. An investment strategy long in high-UNC firms and short in low-UNC firms generates 8.5\% annual risk-adjusted return. UNC valuation risk premium is driven by outperformance of high-UNC firms facing higher information risk and is not explained by established risk factors and firm characteristics.",

keywords = "book-to-market, equity returns, uncertainty, valuation risk",

author = "Bali, \{Turan G.\} and \{Del Viva\}, L. and \{El Hefnawy\}, Menatalla and Lenos Trigeorgis",

note = "Publisher Copyright: Copyright: {\textcopyright} 2023 INFORMS.",

year = "2024",

month = jul,

doi = "10.1287/mnsc.2023.4888",

language = "English",

volume = "70",

pages = "4548--4563",

journal = "Management Science",

issn = "0025-1909",

publisher = "INFORMS Inst.for Operations Res.and the Management Sciences",

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TY - JOUR

T1 - Value Uncertainty

AU - Bali, Turan G.

AU - Del Viva, L.

AU - El Hefnawy, Menatalla

AU - Trigeorgis, Lenos

PY - 2024/7

Y1 - 2024/7

N2 - We examine how time-series volatility of book-to-market (UNC) is priced in equity returns and the relative contributions of its book volatility (variations in earnings and book value) and market volatility components (shocks in required return). UNC captures valuation risk, so stocks with high valuation risk earn higher return. An investment strategy long in high-UNC firms and short in low-UNC firms generates 8.5% annual risk-adjusted return. UNC valuation risk premium is driven by outperformance of high-UNC firms facing higher information risk and is not explained by established risk factors and firm characteristics.

AB - We examine how time-series volatility of book-to-market (UNC) is priced in equity returns and the relative contributions of its book volatility (variations in earnings and book value) and market volatility components (shocks in required return). UNC captures valuation risk, so stocks with high valuation risk earn higher return. An investment strategy long in high-UNC firms and short in low-UNC firms generates 8.5% annual risk-adjusted return. UNC valuation risk premium is driven by outperformance of high-UNC firms facing higher information risk and is not explained by established risk factors and firm characteristics.

KW - book-to-market

KW - equity returns

KW - uncertainty

KW - valuation risk

UR - https://www.scopus.com/pages/publications/85199370578

U2 - 10.1287/mnsc.2023.4888

DO - 10.1287/mnsc.2023.4888

M3 - Article

AN - SCOPUS:85199370578

SN - 0025-1909

VL - 70

SP - 4548

EP - 4563

JO - Management Science

JF - Management Science

IS - 7

ER -

Value Uncertainty

Abstract

Keywords

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