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New research paper on the value premium online

posted Nov 22, 2018, 8:21 AM by Julian Thimme
My new working paper "Fuel is Pumping Premiums: A Consumption-based Explanation of the Value Anomaly", coauthored by Robert Dittmar and Christian Schlag, can be downloaded here. In this paper, we question the standard approach in empirical consumption-based asset pricing to use nondurables and services as a proxy for consumption. We estimate substitution elasticities between different consumption bundles and show that households cannot substitute gasoline consumption by consumption of other nondurable goods or services. As a consequence, gasoline consumption shows up as a separate factor in the pricing kernel. Cross-sectional variation in gasoline consumption betas explains a large part of the value premium. Using a textual analysis of individual firms' 10-K reports, we find that the energy-intensity of firms' businesses are strongly positively related to their book-to-market ratios of equity. As a consequence, value stocks are riskier than growth stock because they suffer from the same energy supply shocks that also affect households.