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Expected returns on value, growth, and HML

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  • Rytchkov, Oleg
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    Abstract

    In this paper, I analyze the predictability of returns on value and growth portfolios and examine time variation of the expected value premium. As a primary tool, I use the filtering technique, which accounts for time variation in expected cash flows and explicitly exploits the constraints imposed by the present value relation. I demonstrate that returns on value and growth portfolios are predictable, and the predictability is stronger for growth stocks. Applying the filtering technique to the HML portfolio, I build a novel powerful forecaster for the value premium. The new forecaster appears to be only weakly related to business cycle variables.

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    File URL: http://www.sciencedirect.com/science/article/B6VFG-4YV82HY-1/2/b2a9f86167269a1054d27f2ab2a59fc7
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Empirical Finance.

    Volume (Year): 17 (2010)
    Issue (Month): 4 (September)
    Pages: 552-565

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    Handle: RePEc:eee:empfin:v:17:y:2010:i:4:p:552-565

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    Web page: http://www.elsevier.com/locate/jempfin

    Related research

    Keywords: Asset pricing Value premium Predictability Kalman filter;

    References

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    Cited by:
    1. In, Francis & Kim, Sangbae & Gençay, Ramazan, 2011. "Investment horizon effect on asset allocation between value and growth strategies," Economic Modelling, Elsevier, vol. 28(4), pages 1489-1497, July.
    2. Shynkevich, Andrei, 2012. "Short-term predictability of equity returns along two style dimensions," Journal of Empirical Finance, Elsevier, vol. 19(5), pages 675-685.

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