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

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

Abstract licence: CC BY-NC

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