Energy price uncertainty and the value premium

Abstract

This paper examines the impact of energy price uncertainty on a range of value anomalies. We demonstrate that the value premium is substantially stronger in periods of heightened energy price uncertainty. Energy price uncertainty exerts an asymmetric effect on the value anomalies, whereby downside energy price uncertainty accentuates the return differences between value and growth stocks compared to upside energy uncertainty. These findings are consistent with the argument that value firms possess a larger amount of inflexible assets than growth firms. Therefore, they struggle more to adjust in periods of elevated energy price uncertainty. We also demonstrate that energy price uncertainty has predictive power on the value premium one-month ahead. Using the Feasible Generalized Least Squares predictive model, energy price uncertainty can help mean-variance investors to obtain a positive annual utility gain across the value anomalies for up to 16.71%.