The Trend of Value Premium and the Predictive Role of Uncertainty Measures in Strategic Asset Allocation

Abstract

This thesis examines the presence of a Value Premium in the US market, and if it has gone down in the second half of the time period from 1963 to 2019. Furthermore, we study the potential predictive power of uncertainty indexes of the Value Premium in the short and medium term. Finally, we aim to build trading strategies based on uncertainty, volatility, and dynamic optimal weighting. Our findings show that higher economic and financial uncertainty, measured by various indexes is consistent with lower premiums. With this, we optimize strategies which succeed in outperforming the baseline Value Premium with better risk-adjusted returns.