Value Premium Research Articles

Investigation on Influence Factors of the C-REIT Market: Applying the Fama-French Three-Factor Model

This research paper has applied the Fama-French Three-Factor Model to the China Real Estate Investment Trust (C-REIT) market over a two-year period from June 2022 to June 2024. The innovation is recognized as the C-REIT market was established in 2021 with the first 9 REITs issued and few researches were conducted on the C-REITs. The study obtained data from the Wind database in the after-COVID period and concluded that the model fits well for the behavior of the Chinese REIT market. The market premium factor is found to be positive, while the size factor (SMB) is negatively significant, and the value premium (HML) is positively significant. This suggests that REITs with smaller market capitalization and those with a higher book-to-market ratio are more likely to contribute to the portfolio's excess returns. The intercept in the regression is statistically significant and that implies that there may be additional factors that are not captured by the current model. As such, the paper advocates for further research into multi-factor models to explore potential factors.

The capitalization of property rights to groundwater

AbstractThere is limited empirical evidence on the value of formal property rights to natural resources when they are not transferable, and there is regulatory uncertainty about enforcement. This paper takes a hedonic approach to understanding how three core features of groundwater property rights—access, allocation, and seniority—are capitalized into agricultural land values in the High Plains Aquifer region of Kansas. We find that groundwater access rights confer an average land value premium of 71%, or $1445/acre in 2019 dollars. Water rights having larger allocations and more seniority are more highly valued in the land market. The seniority effect is small but is consistent with more junior rights facing greater regulatory risk of curtailment. Taken together, these results suggest that the land market capitalizes constraints to groundwater pumping provided by groundwater property rights. We use our empirical estimates to quantify the distributional costs of modifying existing patterns of pumping, a common challenge of groundwater management organizations seeking to improve the sustainability of extraction.

Optimal reinsurance design under distortion risk measures and reinsurer’s default risk with partial recovery

AbstractReinsurers may default when they have to pay large claims to insurers but are unable to fulfill their obligations due to various reasons such as catastrophic events, underwriting losses, inadequate capitalization, or financial mismanagement. This paper studies the problem of optimal reinsurance design from the perspectives of both the insurer and reinsurer when the insurer faces the potential default risk of the reinsurer. If the insurer aims to minimize the convex distortion risk measure of his retained loss, we prove the optimality of a stop-loss treaty when the promised ceded loss function is charged by the expected value premium principle and the reinsurer offers partial recovery in the event of default. For any fixed premium loading set by the reinsurer, we then derive the explicit expressions of optimal deductible levels for three special distortion functions, including the TVaR, Gini, and PH transform distortion functions. Under these three explicit distortion risk measures adopted by the insurer, we seek the optimal safety loading for the reinsurer by maximizing her net profit where the reserve capital is determined by the TVaR measure and the cost is governed by the expectation. This procedure ultimately leads to the Bowley solution between the insurer and the reinsurer. We provide several numerical examples to illustrate the theoretical findings. Sensitivity analyses demonstrate how different settings of default probability, recovery rate, and safety loading affect the optimal deductible values. Simulation studies are also implemented to analyze the effects induced by the default probability and recovery rate on the Bowley solution.

The optimal reinsurance strategy with price-competition between two reinsurers

We study optimal reinsurance for an insurer and two reinsurers in the market through stochastic game theory. The relationship between the insurer and reinsurers is described by a Stackelberg model, where reinsurers, as market leaders, set prices for reinsurance treaties, and the insurer, as a price taker, determines reinsurance demand. Furthermore, we employ a Nash game to model the price competition between the two reinsurers who adopt different premium principles: the variance premium principle and the expected value premium principle. Both the insurer and reinsurers aim to maximize their respective mean-variance cost functions, leading to a time inconsistency control problem. This issue is resolved using a corresponding extended Hamilton-Jacobi-Bellman equation in the game-theoretic framework. We find that the insurer will adopt propositional and excess-of-loss reinsurance strategies with two reinsurers, respectively. Moreover, under an exponential claim size distribution, there exists a unique equilibrium reinsurance premium strategy. Our numerical analysis illuminates the effects of claim size, risk aversion, and the interest rates of the insurer and reinsurers on the equilibrium reinsurance and premium strategies, enhancing the understanding of competition in the reinsurance market.

Investment Portfolio with Convex Optimization and Risk Adjustment Using Multi-Factor Model and Multi-Armed Bandit Algorithm

This paper examines the creation of investment portfolios through convex optimization, multifactor models, and the multi-armed bandit (MAB) algorithms, focusing on the KL-UCB strategy to optimize decisions in uncertain settings. It explores the impact of systematic risk factors using the Fama-French three-factor model, estimating the influence of market, size, and value premiums via linear regression. The use of Monte Carlo simulation is detailed for generating potential asset allocations and calculating their expected returns, volatility, and Sharpe ratios. The optimize minimize function from the SciPy library is employed to construct an efficient frontier and determine optimal asset allocation, aiming to maximize returns or minimize volatility across various risk levels. The findings suggest that the strategy of dynamic weight adjustments combined with the KL-UCB algorithm enhances portfolio returns, particularly during market volatility. The research also reveals a portfolio inclination towards large-cap growth stocks due to the negative impacts of size and value premiums. It concludes that dynamic weight adjustment strategies offer significant potential in optimizing portfolio performance in complex market conditions, though leveraging increases risk and should be carefully managed according to investor risk tolerance.

Job training in polarizing job markets: A longitudinal analysis using administrative microdata

AbstractDeveloped nations have experienced a longstanding trend of reshaping the labour market's occupational structure. This trend, named job market polarization, describes how middle‐level jobs have decreased their relative share of the labour market in favour of high‐ and low‐complexity jobs. The literature has pointed to technological change as the main factor in setting this configuration, which accompanied the transition to a knowledge economy as a source of competitive advantages. Still, the narratives of technological change are anchored to specific technologies and times that do not fit the emerging challenges of the fourth industrial revolution and the increasing relevance of the digital economy. In this paper, I explore how job polarization dynamics have interacted with active labour market policies' effectiveness by focusing on job training skill premiums. I use nationally representative data to evaluate cross‐sectionally and longitudinally the relationship between job training access, job polarization, and wages. The results show that polarization poses a wage penalty while it increases the relative value of training skill premium. I discuss how the setting of a polarized market could be considered for future skill‐based interventions concerning digital technologies.

Optimal insurance with mean-deviation measures

This paper studies an optimal insurance contracting problem in which the preferences of the decision maker are given by the sum of the expected loss and a convex, increasing function of a deviation measure. As for the deviation measure, our focus is on convex signed Choquet integrals (such as the Gini coefficient and a convex distortion risk measure minus the expected value) and on the standard deviation. We find that if the expected value premium principle is used, then stop-loss indemnities are optimal, and we provide a precise characterization of the corresponding deductible. Moreover, if the premium principle is based on Value-at-Risk or Expected Shortfall, then a particular layer-type indemnity is optimal, in which there is coverage for small losses up to a limit, and additionally for losses beyond another deductible. The structure of these optimal indemnities remains unchanged if there is a limit on the insurance premium budget. If the unconstrained solution is not feasible, then the deductible is increased to make the budget constraint binding. We provide several examples of these results based on the Gini coefficient and the standard deviation.

A paradox of economic benefit and social equity of green space in megacity: Evidence from Tianjin in China

Urban green space (UGS) plays a crucial role in socio-ecological systems and has been recognized as an important factor in promoting sustainable cities and communities. Although a few studies have proposed a paradox of the incompatibility of economic benefit and social equity in UGS, the mechanisms through which the economic benefits of UGS interact with social equity have not been adequately demonstrated in developing countries. Here, we employ multi-source geographic information and 1559 residents survey data to investigate not only the economic benefit of UGS in the housing prices market from a macro perspective, but also the social inequity issues resulting from the housing choices of different social classes under "UGS economic benefit" from a micro perspective. Results reveal that the economic value premium of UGS in the housing market triggered a differentiation effect in housing prices, subsequently influencing housing preferences among various social classes, thus intensifying social residential segregation. This phenomenon underscores the emergence of the green space paradox. Moreover, the phenomenon of the UGS paradox has emerged in megacities of developing countries, where UGS is gradually being occupied by social elites, while vulnerable groups remain marginalized. These findings provide valuable insights into the planning layout of UGS in global high-density built-up areas that a small and decentralized UGS layout will be more economically efficient and socially equitable than a large and centralized UGS layout.

Property Value Premium of Transit Accessibility and Light Rail Transit Expansion in Portland, Oregon

Property Value Premium of Transit Accessibility and Light Rail Transit Expansion in Portland, Oregon

The economic-based earnings persistence of earnings momentum and its market implications

PurposePrior research on meeting or beating earnings thresholds documents that firms with earnings momentum are awarded with valuation premiums. However, it is unclear from this strand of literature why this is the case. Therefore, this study aims to investigate the effects of time-varying earnings persistence on earnings momentum and their pricing effects.Design/methodology/approachThis study exploits a firm that reports earnings momentum as research setting to examine whether earnings persistence is significantly higher for firms with consecutive earnings increases. In addition, it investigates a relation between earnings momentum and fundamentals-driven earnings persistence and estimates return associations of earnings momentum conditional on economic-based persistence of earnings.FindingsThe empirical evidence suggests that firms with earnings momentum reflect higher time-varying earnings persistence. It further reveals that longer duration of earnings momentum is associated with higher fundamentals-driven earnings persistence. More importantly, valuation premiums are exclusively assigned to earnings momentum determined by strong firm fundamentals, not momentum itself.Originality/valueThis study provides new empirical evidence that valuation premiums accrued to firms with earnings momentum are conditional on time-varying earnings persistence. The research implications are relevant to investors, regulators and auditors, as the results bring conclusions that earnings momentum reflects successful business models not poor accounting quality. This leads to a more complete view of earnings momentum and helps allocate resources when evaluating earnings-momentum firms.

Anatomy of recent value premium's travails

The recent underperformance of the value effect has prompted investors to question whether the value effect has lost its potency. In the Chinese A-share market where the value effect has vanished like in the U.S. market, there is a negative relationship between value and composite profitability, a metric comprising profitability levels and earnings growth. This steadily intensifying relationship, coupled with the positive and stable composite profitability premium, causes the weakening effect of composite profitability on the value premium to grow more pronounced over time. This substantial dampening effect, the primary driver of the time variations of the value premium, is precisely why the value premium, although impressive in its early stages, remains ineffective over the nearly two decades of the entire sample period. When the interference of composite profitability is removed, the value effect experiences a significant resurgence, boosting returns to an astonishing 1.97% per month.

An empirical study on the early exercise premium of American options: Evidence from OEX and XEO options

AbstractSince the S&P 100 Index underlies both American (OEX) and European (XEO) options, the value of the early exercise premium of American options can be directly observed. We find that the mid‐quote of an XEO option can be higher than that of an otherwise identical OEX option, and liquidity can explain this overpricing phenomenon of European options. Our results show that illiquid options are significantly overpriced in the S&P 100 Index options market. This finding indicates that an illiquid option can be overvalued with a higher market offer price, which is the requirement of market makers for compensation for providing liquidity.

General Purpose and Focused Invention, Market Value, and Productivity

We study returns to general purpose and focused invention at the firm level for a panel of manufacturing firms in the U.S. for the period 1976-1995, by studying their relationships with market value and Total Factor Productivity. We construct stocks of patents that lie at the two relevant tails of the distribution of the generality index (Trajtenberg et al., 1997; Henderson et al, 1998) to measure general purpose and focused invention at the firm level. In line with expectations, there is a market value premium to focused invention, and a productivity premium to general purpose invention. Estimates for the value of focus indicate that moving a single patent from the upper tail of the generality distribution to the lower tail would increase market value by .24×q million 1992 dollars on average, where q is Tobin’s q. The firm with the average general patent stock would gain 6.7×q million in market value if all its patents at the highest quartile of the generality distribution were moved to the lowest. In terms of the value of general purposeness, moving all its focused patents to the general category increases Total Factor Productivity by 2.3% to 2.8%, and five-year productivity growth by 3.9% to 5.2%, for the average firm. A potential implication is that corporate basic research is associated with significant long-term benefits in terms of productivity growth.

On optimal reinsurance in the presence of premium budget constraint and reinsurer’s risk limit

Abstract In this paper, we propose two new optimal reinsurance models in which both premium budget constraints and the reinsurer’s risk limits are taken into account. To be precise, we assume that the reinsurance premium has an upper bound, and that the admissible ceded loss functions have a pre-specified upper limit. Moreover, we assume that the reinsurance premium principle is calculated by the expected value premium principle. Under the optimality criteria of minimizing the value at risk and conditional value at risk of the insurer’s total risk exposure, we derive the explicit optimal reinsurance treaties, which are layer reinsurance treaties. A new approach is developed to construct the optimal reinsurance treaties. Comparisons with existing studies are also made. Finally, we provide a numerical study based on real data and an example to illustrate the proposed models and results. Our work provides a novel generalization of several known achievements in the literature.

Potential Added Value of Premium and Non Premium Rice Farmers in Mlatiharjo Village, Gajah District, Demak Regency

Potential Added Value of Premium and Non Premium Rice Farmers in Mlatiharjo Village, Gajah District, Demak Regency

The value premium in the Vietnamese equity market

In recent decades, the Efficient Market Hypothesis has been the subject of debate among professionals and academics. In this hypothesis, the value premium is a key aspect that challenges market efficiency. The main objective of this study is to comprehensively investigate the value versus growth anomaly in the Vietnamese market between 2013 and 2023. Based on the empirical data, value portfolios have yielded a greater average return than growth portfolios in the Vietnamese stock market during this period. Although their levels of market risk (measured by beta) are nearly the same, the added-risk level of value portfolios is substantially higher than growth portfolios. Therefore, the value premium in Vietnam is compensated for bearing a higher risk level, consistent with the risk-based explanation.

PUBLIC SECTOR WAGE PREMIUM IN POLAND: A HUMAN CAPITAL APPROACH

Aim: The aim of the article is to estimate the value of the public sector wage premium. It is an important issue both in the area of wage management in an organization and labor market performance. Methods: The research method is based on measuring the rates of return on human capital in the public and private sectors. It assumes that human capital is a function of the cost of living, education, and work experience. The average value of human capital was calculated in a model sample of employees in the public, private, and total sectors in each of the analyzed periods. In order to calculate the rate of return, its value was compared with the average wage in each of the sectors. Results: The results indicate the existence of a small average negative public sector wage premium in Poland. However, in some periods, the observed wage gap widens signifi­cantly, reducing the wage competitiveness of the public sector. The results of measuring the return on human capital of employees of both sectors is about 8% per year. Conclusions: The paper’s findings can be used to optimize the wage policy and analyze wage competitiveness in public sector entities. The paper contributes to the sector wage differentials literature by developing an original methodology based on a human capital rate of return and also contributes to the research paradigm on normative return on capital. Findings in the second field are consistent with the concept of an 8% economic constant of potential growth.

Dissecting value-growth strategies conditioned on expectation errors

We examine the previously documented effect between a firm’s FSCORE and book-to-market ratio proposed by Piotroski and So (2012) and analyze the authors’ expectation errors hypothesis from a present value perspective. We find a strong value premium which is concentrated among firms where book-to-market implied expectations are incongruent with underlying fundamental strength. Using the decomposition of variation in book-to-market ratios motivated by Cohen et al. (2003), we show that the observed effect between a firm’s FSCORE and book-to-market ratio is attributable to mispricing as the variation is mostly due to variation in expected returns rather than variation in expected profitability.

Labor leverage and firm risk: Evidence from Korea

Labor expenditure can induce a form of operating leverage at the firm level due to the relative smoothness of wages compared to output. This study investigates the effect of labor-induced operating leverage (i.e., labor leverage) measured by labor share on a firm's risk dimensions in the Korean stock market. We find that labor share increases both equity returns and the default probability at the firm level. Moreover, the amplification of liability risk translates into the riskiness of a firm's assets proxied by asset volatility. Finally, we show that the value premium is stronger for high labor share firms, suggesting a new channel of the book-to-market effect in the cross-section of returns.

Robust reinsurance contract and investment with delay under mean-variance framework

We consider a (non) zero-sum differential game between two insurers and determine a robust reinsurance contract from joint interests of the insurers and the reinsurer under the framework of Stackelberg differential game, that is, a hybrid stochastic differential game framework is introduced in this article. We assume that each party can invest in a financial market consisting of a risk-free asset and a risky asset whose price evolution follows a stochastic volatility model, and the reinsurer charges the premium according to both the expected value premium principle and the variance premium principle. Since the performance-related capital inflow or outflow feature is introduced, the insurers and reinsurer all aim to maximize their own time-inconsistent mean-variance criterion with delay. Using the dynamic programming approach, we derive the equilibrium investment strategy, the robust equilibrium reinsurance contract, and the corresponding equilibrium value functions under two premium principles with certain conditions, respectively. Some interesting properties of the equilibrium investment strategy are proved explicitly, and several numerical examples and sensitivity analysis are presented to demonstrate the effects of model parameters on the equilibrium reinsurance contract.