Working Paper: NBER ID: w31859
Authors: John Y. Campbell; Stefano Giglio; Christopher Polk
Abstract: Value investing delivers volatile returns, with large drawdowns during both market booms and busts. This paper interprets these returns through an intertemporal CAPM, which predicts that aggregate cash flow, discount rate, and volatility news all move value returns. We document that indeed these shocks explain a large fraction of quarterly value returns over the last 60 years. We also distinguish between the intra-industry and inter-industry components of value, showing that the ICAPM explains the former better. Finally, we develop a novel methodology to perform this decomposition at the daily frequency, using it to interpret value returns during the Covid-19 pandemic.
Keywords: Value Investing; Market Returns; Volatility; iCAPM
JEL Codes: G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cash flow news (O16) | value returns (D46) |
| discount rate news (E43) | value returns (D46) |
| volatility news (G17) | value returns (D46) |
| cash flow news (O16) | intraindustry returns (L19) |
| discount rate news (E43) | intraindustry returns (L19) |
| volatility news (G17) | intraindustry returns (L19) |
| cash flow news (O16) | high-frequency variation of returns during COVID-19 (C58) |
| volatility news (G17) | offsetting effects on value returns during COVID-19 (G41) |
| discount rate news (E43) | offsetting effects on value returns during COVID-19 (G41) |