Value Premium and Time-Varying Market Volatility
Abstract/Description
We examine whether the value premium depends on ex‑ante market volatility. Using U.S. equity data from 1963 to 2023, we sort stocks into Size–B/M portfolios and classify each month as low or high volatility according to the quartile of the rolling 60‑month market variance. The value–growth (H–L) spread averages 0.48 % per month after low‑volatility months but is economically trivial after high‑volatility months. The effect is driven by the underperformance of growth stocks, is concentrated in micro‑ and small‑capitalization stocks, and remains partially unexplained by the Fama and French (2025) five‑factor and Hou, Xue, and Zhang (2015) q‑factor models. We also show that institutions systematically sell growth stocks and buy value stocks following low-volatility markets, reversing these trades after high-volatility markets. This volatility‑contingent rebalancing helps reconcile the conditional return pattern with duration risk theory.
Keywords
Value Premium, Market Volatility, Institutional Trading, Duration Risk
Track
Finance
Session Number/Theme
Finance - Session I
Start Date/Time
13-6-2025 4:10 PM
End Date/Time
13-6-2025 5:55 PM
Location
MCS – 3 AMAN CED Building
Recommended Citation
Bhayo, M. U., Butt, H. A., & Kumar, A. (2025). Value Premium and Time-Varying Market Volatility. IBA SBS 4th International Conference 2025. Retrieved from https://ir.iba.edu.pk/sbsic/2025/program/10
COinS
Value Premium and Time-Varying Market Volatility
MCS – 3 AMAN CED Building
We examine whether the value premium depends on ex‑ante market volatility. Using U.S. equity data from 1963 to 2023, we sort stocks into Size–B/M portfolios and classify each month as low or high volatility according to the quartile of the rolling 60‑month market variance. The value–growth (H–L) spread averages 0.48 % per month after low‑volatility months but is economically trivial after high‑volatility months. The effect is driven by the underperformance of growth stocks, is concentrated in micro‑ and small‑capitalization stocks, and remains partially unexplained by the Fama and French (2025) five‑factor and Hou, Xue, and Zhang (2015) q‑factor models. We also show that institutions systematically sell growth stocks and buy value stocks following low-volatility markets, reversing these trades after high-volatility markets. This volatility‑contingent rebalancing helps reconcile the conditional return pattern with duration risk theory.
