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Value Return Predictability Across Asset Classes and Commonalities in Risk Premia

Last Updated on 10 February, 2024 by Rejaul Karim

The research paper “Value Return Predictability Across Asset Classes and Commonalities in Risk Premia” by Fahiz Baba Yara, Martijn Boons, and Andrea Tamoni delves into the intriguing domain of value return predictability across various asset classes, shedding light on the commonalities in risk premia.

Through a comprehensive analysis encompassing individual equities, industries, commodities, currencies, global government bonds, and stock indexes, the study unveils the predictability of value strategies based on their respective value spreads.

Notably, the findings reveal the substantial variation in expected value returns across diverse asset classes, with a significant portion of this predictability attributed to a common component of the value spreads. The study contends that the common variation in value premia aligns with rationally time-varying expected returns, as evidenced by the association with conventional risk proxies and the heightened value premia during periods of market distress.

This research not only contributes to advancing our understanding of global asset pricing and return predictability but also offers valuable insights into the nuanced dynamics of alternative assets and the interplay between common and asset-class-specific value.

Abstract Of Paper

We show that returns to value strategies in individual equities, industries, commodities, currencies, global government bonds, and global stock indexes are predictable in the time series by their respective value spreads. In all these asset classes, expected value returns vary by at least as much as their unconditional level. A single common component of the value spreads captures about two-thirds of value return predictability and the remainder is asset-class-specifc. We argue that common variation in value premia is consistent with rationally time-varying expected returns, because (i) common value is closely associated with standard proxies for risk premia, such as the dividend yield, intermediary leverage and illiquidity, and (ii) value premia are globally high in bad times.

Original paper – Download PDF

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Author

Fahiz Baba Yara
Indiana University – Kelley School of Business

Martijn Boons
Tilburg University

Andrea Tamoni
Rutgers, The State University of New Jersey – Rutgers Business School at Newark & New Brunswick

Conclusion

In conclusion, the study on “Value Return Predictability Across Asset Classes and Commonalities in Risk Premia” by Fahiz Baba Yara, Martijn Boons, and Andrea Tamoni uncovers the predictability of returns to value strategies across diverse asset classes.

The research demonstrates that a substantial portion of the expected value returns can be attributed to a common component of the value spreads, indicating rationally time-varying expected returns. This consistency aligns with standard risk proxies and is reinforced by the observation of heightened value premia during challenging market conditions.

The findings not only advance our understanding of the dynamics of global asset pricing and return predictability but also underscore the importance of recognizing commonalities in value premia and asset-class-specific variations, shedding valuable light on the complexities of alternative asset investments and the interplay between common and asset-class-specific value.

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FAQ

What is the main concept explored in the research paper on “Value Return Predictability Across Asset Classes and Commonalities in Risk Premia”?

The main concept explored in the research paper is the predictability of returns to value strategies across various asset classes. The study investigates the value return predictability in individual equities, industries, commodities, currencies, global government bonds, and global stock indexes by analyzing their respective value spreads.

What does the study reveal about the predictability of value strategies across diverse asset classes?

The study reveals that returns to value strategies across diverse asset classes, including individual equities, industries, commodities, currencies, global government bonds, and global stock indexes, are predictable in the time series based on their respective value spreads. The expected value returns exhibit substantial variation across these asset classes, and a common component of the value spreads accounts for about two-thirds of the predictability, with the remainder being asset-class-specific.

What is the significance of the common component in value spreads mentioned in the study?

The study emphasizes the significance of a common component in value spreads, suggesting that this common variation in value premia is consistent with rationally time-varying expected returns. The common component is closely associated with standard proxies for risk premia, such as the dividend yield, intermediary leverage, and illiquidity. This association supports the idea that the predictability observed in value strategies is in line with expected returns varying rationally over time.

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