Distress or Discount? Value Premium Dynamics Following Market Crashes

Abstract

This thesis studies whether the HML factor in the Fama-French Three-Factor Model earns abnormally high returns in the 252 trading days following major U.S. stock market crashes, using data from 1970 to 2025, and examines the implications of these results for the debated risk and mispricing explanations of the value premium. Using OLS time-series regressions with Newey-West standard errors, the main regression reveals no statistically significant post-crash value premium on average, which is broadly consistent with the risk explanation. However, crash-specific analyses reveal considerable heterogeneity within the pooled main regression. While negative results dominate among significant episodes supporting the risk explanation, notable exceptions include the 2008-2009 Global Financial Crisis (GFC) and the 2020 COVID-19 recoveries, which support the mispricing explanation. A robustness check at the -30% threshold shows a positive, marginally significant coefficient, yet the crash-specific analysis shows it was entirely driven by the GFC rather than a universal pattern, suggesting that crash severity is neither a necessary nor sufficient condition for post-crash value outperformance. The subsample robustness check also supports the post-2000 structural weakening of the value premium documented in the literature, with the unconditional premium losing statistical significance in the post-2000 subsample.