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 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 Feedbackhypothesis. Further، the impacts for value stocks are more than that of growth stocks، and for negative shocks are more than that of positive shocks.