Abstract
In recent years, growth firms outperformed value firms, which led investors to doubt value strategy in their investments. Reworking the Euler equation shows that time-varying risk is responsible for the reverting risk-return relation from negativity contemporaneously to positivity with a time lag. The negative relation is due to the volatility feedback effect, while the positive relation is the risk premium effect. Because of the negative volatility feedback effect, growth firms outperform value firms, particularly in heightened stock market volatility, such as in the first year of the Covid-19 pandemic. However, we find value firms earn a higher average return than growth firms over long horizons.
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