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Downside risk aversion, fixed-income exposure, and the value premium puzzle

Guido Baltussen, Gerrit T. Post and Pim Vliet

Journal of Banking & Finance, 2012, vol. 36, issue 12, 3382-3398

Abstract: The value premium is relatively small for investors with a material fixed-income exposure, such as insurance companies and pension funds, especially when they are downside-risk-averse. Value stocks are less attractive to these investors because they offer a relatively poor hedge against poor bond returns. This result arises for plausible, medium-term evaluation horizons of around one year. Our findings cast doubt on the practical relevance of the value premium for these investors and reiterate the importance of the choice of the relevant test portfolio, risk measure and investment horizon in empirical tests of market portfolio efficiency.

Keywords: Downside risk; Fixed income; Investment horizon; Value premium; Asset pricing (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2012
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Handle: RePEc:eee:jbfina:v:36:y:2012:i:12:p:3382-3398