1 Who are the Value and Growth Investors? Sebastien Betermier, Laurent E. Calvet, and Paolo Sodini Discussion by Frank de Jong Tilburg University 9 th Financial Risks Forum, March 2016

2 Summary  Using very detailed data on individual stock holdings, the paper finds strong patterns in value vs. growth investments  There is a strong age effect, with young investors having a negative value tilt and older investors a positive value tilt  Wealthier investors and investors with less idiosyncratic risk also show a more positive value tilt  The paper argues that these effects are consistent with many risk-based and behavioral theories  My comments focus on these explanations

3 Risk based explanations  Value investing as:  hedge against poor future returns  hedge against changes in human capital  background risk

Intertemporal hedging  Value investments could be a hedge against poor future returns  According to the paper, high value returns predict higher risk premiums  That would imply a negative intertemporal hedging demand for value stocks  And more so for investors with a long horizon, if the predictability is persistent (is that the case?)  This seems consistent with the findings that young investors have a negative exposure to value 4

Human capital hedge  Most of a young person’s wealth is the present value of future labor income (human capital)  This position is non-traded and induces hedge demands for assets that have negative correlation with human capital returns ( Eiling, JF, 2013)  Human capital returns are proxied by labor income growth  So, the prediction is that young people will have a negative value tilt when the covariance between labor income growth and value returns is positive  Is that the case? I don’t see any evidence on this in the paper. What do other papers say? 5

Background risk  Not sure, the argument seems to assume that investing in the market portfolio is efficient, and deviating from that brings idiosyncratic risk  Even if this is the correct view, both positive and negative tilts bring idiosyncratic risk; this cannot explain the upward sloping age and wealth patterns  Effects of background risk on portfolio allocations and welfare losses are generally small anyway, so this is unlikely to explain the value premium 6

7 An Equilibrium Model with Buy and Hold Investors Tao Wu Discussion by Frank de Jong Tilburg University 9 th Financial Risks Forum, March 2016

8 Summary  The paper derives equilibrium expected returns, risk premiums and volatilities in an economy with two assets (bond and stock) and two traders  Trader 1 is unrestricted  Trader 2 follows a buy-and-hold strategy  The sub-optimal asset allocation of trader 2 leads to higher marginal utility and, in equilibrium, to a higher equity premium and Sharpe ratio

9 Comments  The paper summarizes the effect of the buy-and- hold investor in two additional state variable, capturing the fraction of stocks held by the buy- and-hold investor, η(t), and the “exchange rate” between the consumption of both investors, λ(t)  This makes the problem Markovian and it can be solved  But this makes the investment opportunity set for the investors stochastic, and I expected the state variables to show up in asset demands  Intertemporal hedging effects

10 Comments  The parameter choices for the comparative statics seem fairly extreme:  Investment horizon is T=50 years; but it seems quite extreme never to rebalance a portfolio over such a long horizon  With more frequent rebalancing, welfare losses and pricing effects are typically fairly small, see e.g. Ang, Papanikolaiou and Westerfield  Investors are willing to forego 2% of their wealth to hedge against illiquidity crises occurring once every ten years.  Also, η(t)=1 and λ(t)=4 seem extreme and unlikely to appear in this economy  Simulate the model to generate ‘reasonable’ paths