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Article

Value Effect and Macroeconomic Risk

Cathy Xuying Cao, Chongyang Chen and Vinay Datar
The Journal of Investing Fall 2017, 26 (3) 41-52; DOI: https://doi.org/10.3905/joi.2017.26.3.041
Cathy Xuying Cao
is an associate professor in the Albers School of Business and Economics at Seattle University in Seattle, WA
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Chongyang Chen
is an assistant professor in the School of Business at Pacific Lutheran University in Tacoma, WA
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Vinay Datar
is a professor in the Albers School of Business and Economics at Seattle University in Seattle, WA
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Abstract

The authors study the extent to which macroeconomic risk (i.e., the innovations in macroeconomic variables) drives the positive cross-sectional relationship between future stock returns and relative firm value, using such measures as the book-to-market ratio and earnings-to-price ratio. The authors provide evidence that value stocks are riskier than growth stocks. They show that value stocks have higher risk loadings than growth stocks on the growth rate of industrial production, the term premium, and the default premium. They also find that the risk loadings and risk premiums account for more than half of the average return spreads between value and growth portfolios. The evidence suggests that risk plays an important role in explaining the value effect, which has implications for value and growth investment.

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The Journal of Investing: 26 (3)
The Journal of Investing
Vol. 26, Issue 3
Fall 2017
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Value Effect and Macroeconomic Risk
Cathy Xuying Cao, Chongyang Chen, Vinay Datar
The Journal of Investing Aug 2017, 26 (3) 41-52; DOI: 10.3905/joi.2017.26.3.041

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Value Effect and Macroeconomic Risk
Cathy Xuying Cao, Chongyang Chen, Vinay Datar
The Journal of Investing Aug 2017, 26 (3) 41-52; DOI: 10.3905/joi.2017.26.3.041
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  • Article
    • Abstract
    • CONTRIBUTION
    • HYPOTHESIS
    • DATA AND METHODOLOGY
    • UNIVARIATE TEST ON VALUE EFFECT
    • MACROECONOMIC RISK EXPOSURE OF PORTFOLIOS
    • EXPLAINING THE VALUE PREMIUM WITH MACROECONOMIC RISK LOADINGS
    • ROBUSTNESS CHECK
    • CONCLUSION
    • ENDNOTES
    • REFERENCES
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