Working Paper: NBER ID: w20062
Authors: Jerry Tsai; Jessica A. Wachter
Abstract: Why do value stocks have higher average returns than growth stocks, despite having lower risk? Why do these stocks exhibit positive abnormal performance while growth stocks exhibit negative abnormal performance? This paper offers a rare-events based explanation that can also account for the high equity premium and volatility of the aggregate market. The model explains other puzzling aspects of the data such as joint patterns in time series predictablity of aggregate market and value and growth returns, long periods in which growth outperforms value, and the association between positive skewness and low realized returns.
Keywords: Value Premium; Growth Stocks; Rare Events; Asset Pricing; Market Volatility
JEL Codes: G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Disasters (H84) | Risk Premia (G19) |
| Risk Premia (G19) | Realized Returns (in samples with disasters) (G17) |
| Disasters (H84) | Realized Returns (in samples with disasters) (G17) |
| Booms (Q33) | Risk Premia (G19) |
| Risk Premia (G19) | Realized Returns (in samples without booms) (G17) |
| Booms (Q33) | Realized Returns (in samples without booms) (G17) |
| Value Stocks (G12) | Abnormal Performance (D29) |
| Growth Stocks (O00) | Poor Performance (D29) |
| Average Excess Market Return (G17) | Value Stocks Yield (G12) |
| Average Excess Market Return (G17) | Growth Stocks Yield (O44) |
| Boom Premium (E32) | Samples with Booms (Q33) |
| Boom Premium (E32) | Samples without Booms (Q33) |