Premium
Value versus Growth: Time‐Varying Expected Stock Returns
Author(s) -
Gulen Huseyin,
Xing Yuhang,
Zhang Lu
Publication year - 2011
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/j.1755-053x.2011.01146.x
Subject(s) - value premium , predictability , economics , growth stock , volatility (finance) , econometrics , stock (firearms) , value (mathematics) , risk premium , markov chain , equity premium puzzle , capital asset pricing model , financial economics , stock market , mathematics , statistics , stock market bubble , mechanical engineering , paleontology , horse , biology , engineering
Is the value premium predictable? We study time variations of the expected value premium using a two‐state Markov switching model. We find that when conditional volatilities are high, the expected excess returns of value stocks are more sensitive to aggregate economic conditions than the expected excess returns of growth stocks. As a result, the expected value premium is time varying. It spikes upward in the high volatility state, only to decline more gradually in the subsequent periods. However, out‐of‐sample predictability of the value premium is close to nonexistent.