Is value premium a proxy for time-varying investment opportunities: some time series evidence
Abstract: We uncover a positive, empirical risk-return tradeoff in the stock market after controlling for the covariance of stock market returns with the value premium. The underlying premise is that, as conjectured by Fama and French (1996), the value premium is a proxy for time-varying investment opportunities. By ignoring the value premium, early specifications suffer from an omitted variable problem that leads to a downward bias in the estimate of the risk-return tradeoff. The paper also documents a new finding on a significantly positive relation between the value premium and its conditional variance.
Keywords: time series analysis; Stocks;
File(s): File format is application/pdf http://research.stlouisfed.org/wp/more/2005-026/
Provider: Federal Reserve Bank of St. Louis
Part of Series: Working Papers
Publication Date: 2006