Reportgreen2010

Value versus Growth: Time-Varying Expected Stock Returns

21 citations0/0 files storedNational Bureau of Economic Research

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Financial Markets and Investment Strategies Financial Risk and Volatility Modeling Financial Reporting and Valuation Research

Abstract

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 ensuring periods.However, out-of-sample predictability of the value premium is close to nonexistent.

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References

1989A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle 1994Contrarian Investment, Extrapolation, and Risk 1988Agency Costs, Net Worth, And Business Fluctuations 1989Business conditions and expected returns on stocks and bonds 1988The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors 1989Why Does Stock Market Volatility Change Over Time?1977Asset returns and inflation 1981STOCK PRICES, REAL ACTIVITY, INFLATION AND MONEY

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2010When Does Investor Sentiment Predict Stock Returns?2010Expected returns on value, growth, and HML

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