| Paper Number | KCB-WP-2017-001 |
|---|---|
| Title | The Impact of Uncertainty Shocks on the Cross-Section of Returns |
| Title(Other) | |
| Author | Woo Hwa Koh |
| Publisher | |
| Abstract | Uncertainty shocks can explain the value premium puzzle. Intuitively, the value of growth options increases when uncertainty is high. As a result, growth stocks pro-vide a hedge against uncertainty risk and earn lower risk premiums than value stocks. An investment-based asset pricing model augmented with time-varying uncertainty ac-counts for both the value premium and the empirical failure of the capital asset pricing model (CAPM). This study also shows that uncertainty shocks influence cross-sectional investment. The investment of value ?rms is more severely affected by uncertainty shocks than that of growth firms. |
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