Study of Asymmetric Risk Premium in Value and Growth Stocks Based on P/E Ratio

Pourebrahimi, Mohamadreza; Pouyanfar, Ahmad; Mousavi, Seyed Mohsen

doi:10.22059/jfr.2013.51076

Study of Asymmetric Risk Premium in Value and Growth Stocks Based on P/E Ratio

Document Type : Research Paper

Authors

¹ Assistant Prof., Dep. of Management and Accounting, University of Tehran, Iran

² Ph.D. of Financial Management, University of Tehran, Iran

³ Master of Finance, University of Shahid Beheshti, Tehran, Iran

10.22059/jfr.2013.51076

Abstract

In this thesis we predict asymmetric risk premium in both
value and growth stock portfolios. There are two competing
approaches to explain value premium: Market Over-reaction
Hypothesis based on which agents overstate future returns on growth
stock, and Rational Market Risk Hypothesis that says value stocks are
inherently riskier than growth stocks. Rational Market Risk
Hypothesis has two different explanations: Leverage Effect and
Volatility Feedback. We use asymmetric GARCH-M model (whose
codes are written by Dr. Shapoor Mohamadi, University of Tehran) to
study which of these hypotheses can explain asymmetric risk premium
in6 portfolios (3 value and 3 growth stock portfolios).Using
asymmetric QGARCH-M model, this paper tests the predictions of the
two hypotheses. Also we examine whether returns exhibit a positive
(negative) risk premium resulting from a negative (positive) shock and
the relative size of any premium. The population of this study includes
all stock companies and non-financial stock companies during 2002 to
2010. The results of this study confirm Volatility Feedback
hypothesis. Further, the impacts for value stocks are more than that of
growth stocks, and for negative shocks are more than that of positive
shocks.

Keywords