Value Premium Research Articles

The Fundamental-to-Market Ratio and the Value Premium Decline

Recent evidence indicates the value premium declined over time. In this paper, we argue this decline happened because book equity, BE, is no longer a good proxy for fundamental equity, FE, defined as the equity value originating purely from cash flows. Specifically, we estimate FE for public US firms (from 1973 to 2018) and find that the premium associated with the fundamental-to-market ratio, FE/ME, subsumes the BE/ME premium and has been stable while the cross-sectional correlation between FE/ME and BE/ME decreased over time, inducing an apparent decline in the value premium. We also show that FE/ME provides a better value premium signal than several alternative valuation ratios beyond BE/ME.

Public Sentiment and the Price of Corporate Sustainability

Combining corporate sustainability performance scores based on environmental, social and governance (ESG) data with big data measuring public sentiment about a company’s sustainability performance, I find that the valuation premium paid for companies with strong sustainability performance has increased over time and that the premium is increasing as a function of positive public sentiment momentum. An ESG factor going long on firms with superior or increasing sustainability performance and negative sentiment momentum and short on firms with inferior or decreasing sustainability performance and positive sentiment momentum delivers significant positive alpha. This low sentiment ESG factor is uncorrelated with other factors, such as value, momentum, size, profitability and investment. In contrast, the high sentiment ESG factor delivers insignificant alpha and is strongly negatively correlated with the value factor. The evidence suggests that public sentiment influences investor views about the value of corporate sustainability activities and thereby both the price paid for corporate sustainability and the investment returns of portfolios that consider ESG data.

Public Sentiment and the Price of Corporate Sustainability

Combining environmental, social, and governance (ESG) data with “big data” measuring public sentiment about corporate sustainability performance, I found that the valuation premium for strong sustainability performance increases as a function of positive momentum in public sentiment. An ESG factor long (short) on companies with superior (inferior) sustainability performance and negative (positive) ESG sentiment momentum delivered significant positive alpha. In contrast, the high-sentiment ESG factor delivered insignificant alpha and was negatively correlated with the value factor. The evidence suggests that public sentiment influences investor views about the value of sustainability activities and that big ESG data can be useful in identifying “value” ESG stocks.

Value Return Predictability across Asset Classes and Commonalities in Risk Premia

Abstract 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 specific. 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.

Value and patience: The value premium in a dividend-growth model with hyperbolic discounting

We show that in a consumption-based asset-pricing model with hyperbolic discounting - leading to dynamically inconsistent time preferences - the value premium increases nonlinearly with the degree of discounting and thus affects the cross section of returns. To test our model empirically, we relate the size of the value premium in 41 countries to the degree of hyperbolic discounting across those countries. The latter was found in an International Test of Risk Attitudes (INTRA). Our result is robust to the inclusion of other variables from INTRA, such as risk aversion, as well as micro- and macro-economic variables from the 41 countries.

Untangling the Value Premium with Labor Shares

Abstract This paper quantifies the relative importance of labor-induced operating leverage at explaining the value premium. I extend a traditional variance decomposition methodology using labor shares to disentangle labor leverage from the value premium and from the value spread and from the variation in profitability levels and growth. My extended decomposition shows that labor leverage explains approximately 50% of the value premium, whereas profitability and growth-based mechanisms explain the other 50%. I propose a tractable production-based asset-pricing model that qualitatively and quantitatively explains this finding, as well as the relation between book-to-market ratios, discount rates, profitability, and future growth.

Branded premiums in tourism destination promotion

Purpose The purpose of this paper is to test the influence of branded premiums or branded free gifts (e.g. a free of charge suitcase of a well-recognised brand) on tourism destination promotion. Specifically, the impact of brand name and price value of a branded premium on promoting a tourism destination was examined. Design/methodology/approach This research uses two experiment-based studies, applying a between-group experimental design. Findings The results revealed that appreciation leads to intention to visit the promoted destination when the branded promotion is offered. When a destination promotional offer contains a branded premium, consumers respond more favourably to the brand name of the premium than the price value of the premium. This finding applies to consumers’ responses to both the destination and the premium. Research limitations/implications This research adds to the body of knowledge on tourism destination promotion and the branding literature, specifically with promotional and branded premiums. Practical implications Mutual benefits can be obtained by both tourism destination marketers and premium marketers. Originality/value This research highlights the importance of branded premiums in tourism destination promotional offers. This research also shows the influence of the price value of a premium’s brand name in a tourism destination promotional offer.

An investigation of the open-system Bus Rapid Transit (BRT) network and property values: The case of Brisbane, Australia

Abstract This paper presents an investigation of the open-system Bus Rapid Transit (BRT) network on property values. An open-system BRT is one where bus feeder lines can enter and leave the BRT system, depending on their origin or destination so the BRT system infrastructure is shared by multiple routes. Brisbane, Australia is the empirical setting where smartcard (GoCard) data shows that 43% of bus passengers accessed the BRT system from feeder line stops. The paper investigates whether feeder line stops are important for increasing network accessibility in Brisbane’s open-system BRT. The hypothesis underpinning the study is that the improved accessibility resulting from an open-system BRT network results in higher property values within feeder line corridors in addition to simply around the BRT system. A Geographically Weighted Generalized Linear Model (GWGLM) is used to investigate property value premiums and their spatial distribution. GWGLM makes an improvement over Geographically Weighted Regression Model (GWR) by providing flexible local and global variable settings that decrease the risk of multi-collinearity in local models. The results identify property value uplift of up to 1.64% for every 100 m closer to feeder bus stops with frequent services in western and eastern Brisbane suburbs. Future studies should pay attention to the type of BRT operation (whether open- or closed-) in investigating the value of accessibility from BRT implementation. The results are policy relevant for the debate between whether BRT systems should be open or closed.

Short-run Risk, Business Cycle, and the Value Premium

We jointly explain the variations of the equity and value premium in a model with both short-run (SRR) and long-run (LRR) consumption risk. In our preliminary empirical analysis, we find that SRR varies with the business cycle and it has a substantial predictive power for market excess returns and the value premium|both in-sample and out-of-sample. The LRR component also differs significantly from zero, and value stocks have a larger exposure to both LRR and SRR than growth stocks. To explain these patterns in asset returns, we propose an extended and analytically tractable LRR model.

Calculating Premium Credibility Using the Buhlmann-Straub Modelwith Nonparametric Assessment

When an insurance company calculates the premium it will divides the policy holders into groups. The division is considered based on risk level in each group. The problem is then to devise a way of combining the experience risk of the group with the experience of the individual risk to calculate the premium, so then Credibility Theory provides a solution to this problem.This script discuss about calculation of credibility premium use Buhlmann-Straub Model with nonparametric estimation to the aggregate claim amount data set within few years observation in some group of policy holders in general insurance. By using credibility theory we can calculate the value of credibility factor and credibility premium or future premium. The value of premium credibility is calculated from only one group of policyholders from the previous year's data. For better value of premium credibility, data with more experience years and the policyholder group better reflect the total loss value during the observation year.The result of this calculation are credibility factor per group, average credibility premium per members in group and credibility premium total for the last year for each group. We can obtain total losses and total premium which surprisingly equal.Â

An Evaluation of the New Japanese Bonus–Malus System with No-claim and Claimed Subclasses

Abstract The purpose of this research is to evaluate the new Japanese Bonus–Malus System (BMS 2012) in automobile insurance, which is an unusual system wherein both no-claim and claimed subclasses exist. To evaluate BMS 2012, we conduct a simulation analysis and compare BMS 2012 with the former Japanese BMS (BMS 2009) in terms of the present value of the total insurance premium that is closely related to the frequency of insurance claims. Based on the comparison, our main conclusion is that BMS 2012 offers more effects to lower the frequency of insurance claims than BMS 2009 does when the policyholders’ classes in BMS are high classes that evaluate as safety drivers, time discount and/or renewal rates are relatively low, and the policyholders’ risk averseness is large.

The Value Premium

Value premiums, which we define as value portfolio returns in excess of market portfolio returns, are on average much lower in the second half of the July 1963-June 2019 period. But the high volatility of monthly premiums prevents us from rejecting the hypothesis that expected premiums are the same in both halves of the sample. Regressions that forecast value premiums with book-to-market ratios in excess of market (BM-BM_M) produce more reliable evidence of second-half declines in expected value premiums, but only if we assume the regression coefficients are constant during the sample period.

Does the Value Premium Decline with Investor Interest in Value?

I approximate the interest that value investing attracts through the frequency with which terms such as “book-to-market ratio” appear in the corpus of books scanned by Google. Following the years in which investor interest in value is relatively high, the realized value premium is found to be below average. On the other hand, there is no evidence that secular trends in interest have an impact on the value premium. The results therefore do not support the hypothesis that the value effect disappears once investors have become aware of it.

Optimal reinsurance from the perspectives of both insurers and reinsurers under the VaR risk measure and Vajda condition

In this article, we revisit the optimal reinsurance problem by minimizing the convex combination of the VaRs of the insurer’s loss and the reinsurer’s loss. To prevent moral hazard and to reflect the spirit of reinsurance, we assume that the set of admissible ceded loss function is the class of ceded loss functions such that the retained loss functions are increasing and the ceded loss functions satisfy Vajda condition. We analyze the optimal solutions for a wide class of reinsurance premium principles that satisfy the following three properties: law invariance, risk loading property and stop-loss ordering preserving. Meanwhile, we use the expected value premium principle to derive the explicit expressions for the optimal reinsurance treaties. Finally, we construct a numerical example to illustrate our results.

Nash Equilibrium Investment-Reinsurance Strategies for an Insurer and a Reinsurer with Intertemporal Restrictions and Common Interests

This paper investigates the generalized multi-period mean-variance investment-reinsurance optimization model in a discrete-time framework for a general insurance company that contains a reinsurer and an insurer. The intertemporal restrictions and the common interests of the reinsurer and the insurer are considered. The common goal of the reinsurer and the insurer is to maximize the expectation of the weighted sum of their wealth processes and minimize the corresponding variance. Based on the game method, we obtain the Nash equilibrium investment-reinsurance strategies for the above-proposed model and find out the equilibrium strategies when unilateral interest is considered. In addition, the Nash equilibrium investment-reinsurance strategies are deduced under two special premium calculated principles (i.e., the expected value premium principle and the variance value premium principle). We theoretically study the effect of the intertemporal restrictions on Nash equilibrium investment-reinsurance strategies and find the effect depends on the value of some parameters, which differs from the previous researches that generally believed that intertemporal restrictions would make investors avoid risks. Finally, we perform corresponding numerical analyses to verify our theoretical results.

Political uncertainty, market anomalies and Presidential honeymoons

The first 100 days of a newly-elected President's administration are often a period of substantial and concentrated policy change. This paper shows that measures of uncertainty and risk aversion rise sharply during Presidential honeymoons. Consistent with theoretical models that suggest that investors demand compensation for bearing heightened political risk, we document striking spread returns to value, investment and profitability anomalies during honeymoons. For example, the book-to-market value premium averages 3.51% per month during Presidential honeymoons, yet only 0.27% per month at other times. These findings survive numerous robustness checks. Nonetheless, establishing a direct link between escalating political risk and equity returns proves challenging.

Operating Leverage and Stock Returns: International Evidence

We use an international sample of 20 developed countries to test theories predicting an association between operating leverage with stock returns and the value premium. Results suggest that operating leverage is related to stock returns and the value premium across the sampled countries. These results are robust to multiple definitions of operating and financial leverage, and the endogeneity of operating and financial leverage. Results on the association between financial leverage and the value premium are sensitive to variable definitions. Consistent with recent theories, we also find that a country’s labor share is positively associated with the value premium. Overall, we find support for the notion that the value premium reflects compensation for exposure to systematic operating risk.

Is There a Value Premium in Cryptoasset Markets?

This paper identifies active addresses-to-network value as an additional common risk factor in the returns on cryptoassets. Active addresses refer to the number of unique wallet addresses that conduct an on-chain transaction, whereas the network value of a cryptoasset corresponds to its market capitalization. Investigating 652 cryptoassets, I find that there are anomalous returns that increase with active addresses-to-network value ratio, a proxy for the value anomaly. Cryptoassets with a high active address to network value ratio yield on average 2.1 percentage points higher weekly returns compared to cryptoassets with low active addresses to network value ratio, and comparable size. A four-factor model directed at capturing the value pattern in average returns performs better than a three-factor model, including the market, size, and momentum factor. Importantly, the results suggest that cryptoasset prices are related to their fundamentals.

The Effects of Financial and Operational Hedging on Company Value: The Case of Malaysian Multinationals

This study examines the value effects of financial and operational hedging in a managed floating exchange rate regime with strict limitations on the trading of Malaysian Ringgit for a sample of 109 Malaysian multinationals from 2004 to 2018. Using Tobin’s Q as a proxy for company value, the two-step system GMM estimation results show that, on average, derivatives hedging creates a value premium range of 7.88-8.21% in the short-run, and 18.81-19.80% in the long-run. This value premium emerged both after controlling for non-operational foreign exchange profits (losses), and its two components: transaction and translation profits (losses). In contrast, foreign debt hedging, on average, creates a value discount range of 8.19-8.54% in the short-run and 12.70-13.12% in the long-run. No evidence shows value effect for operational hedging though. The positive value effect of derivatives hedging should motivate managers of Malaysian multinationals to hedge foreign currency exposure through derivatives and encourage policymakers to take steps in developing derivatives market and products. However, the negative value effect of foreign debt hedging indicates that it destroys value. This negative effect might reflect two potential causes; higher company risk due to FC debt financing, and improper hedging practices including high costs of hedging in the underdeveloped derivatives market. These potential causes need further empirical evaluations.

Is financial globalization in reverse after the 2008 global financial crisis? Evidence from corporate valuations

For the last two decades, non-US firms have lower valuations than similar US firms. We study the evolution of this valuation gap to assess whether financial markets are less integrated after the 2008 global financial crisis (GFC). The valuation gap for firms from developed markets increases by 31% after the GFC – a reversal in financial globalization – while the gap for firms from emerging markets (excluding China) stays stable. There is no evidence of greater segmentation for non-US firms cross-listed on major US exchanges and the typical valuation premium of such firms relative to domestic counterparts stays unchanged. However, the number of such firms shrinks sharply, so that the importance of US cross-listings as a mechanism for market integration diminishes.