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The Expected Value Premium

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  • Long Chen
  • Ralitsa Petkova
  • Lu Zhang

Abstract

Fama and French (2002) estimate the equity premium using dividend growth rates to measure the expected rate of capital gain. We use similar methods to study the value premium. From 1941 to 2002, the expected HML return is on average 5.1% per annum, consisting of an expected-dividend-growth component of 3.5% and an expected-dividend-to-price component of 1.6%. The ex-ante HML return is also countercyclical: a positive, one-standard-deviation shock to real consumption growth rate lowers this premium by about 0.45%. Unlike the equity premium, there is only mixed evidence suggesting that the value premium has declined over time.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12183.

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Date of creation: May 2006
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Publication status: published as Chen, Long & Petkova, Ralitsa & Zhang, Lu, 2008. "The expected value premium," Journal of Financial Economics, Elsevier, vol. 87(2), pages 269-280, February.
Handle: RePEc:nbr:nberwo:12183

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Citations

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Cited by:
  1. Huseyin Gulen & Yuhang Xing & Lu Zhang, 2011. "Value versus Growth: Time‐Varying Expected Stock Returns," Financial Management, Financial Management Association International, Financial Management Association International, vol. 40(2), pages 381-407, 06.
  2. Huang, I-Hsiang, 2011. "The cyclical behavior of the risk of value strategy: Evidence from Taiwan," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 19(4), pages 404-419, September.
  3. Ai, Hengjie & Kiku, Dana, 2013. "Growth to value: Option exercise and the cross section of equity returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 107(2), pages 325-349.
  4. Jin Ginger Wu & Lu Zhang, 2010. "Does Risk Explain Anomalies? Evidence from Expected Return Estimates," NBER Working Papers 15950, National Bureau of Economic Research, Inc.
  5. Victoria Atanasov, 2013. "The Size Effect in Value and Momentum Factors: Implications for the Cross-section of International Stock Returns," Tinbergen Institute Discussion Papers, Tinbergen Institute 13-180/IV/DSF66, Tinbergen Institute.
  6. Hernán Ortiz-Molina & Gordon M. Phillips, 2010. "Asset Liquidity and the Cost of Capital," NBER Working Papers 15992, National Bureau of Economic Research, Inc.
  7. Hwang, Soosung & Rubesam, Alexandre, 2013. "A behavioral explanation of the value anomaly based on time-varying return reversals," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(7), pages 2367-2377.
  8. Amélie Charles & Olivier Darné & Zakaria Moussa, 2014. "The sensitivity of Fama-French factors to economic uncertainty," Working Papers, HAL hal-01015702, HAL.
  9. Arnold, Marc & Wagner, Alexander F. & Westermann, Ramona, 2013. "Growth options, macroeconomic conditions, and the cross section of credit risk," Journal of Financial Economics, Elsevier, Elsevier, vol. 107(2), pages 350-385.
  10. Rytchkov, Oleg, 2010. "Expected returns on value, growth, and HML," Journal of Empirical Finance, Elsevier, Elsevier, vol. 17(4), pages 552-565, September.
  11. Zeng Liujing & Yong Hue Hwa Au & Treepongkaruna Sirimon & Faff Robert, 2014. "Is there a Banking Risk Premium in the US Stock Market?," Journal of Financial Management, Markets and Institutions, Società editrice il Mulino, Società editrice il Mulino, issue 1, pages 27-42, July.
  12. John H. Cochrane, 2011. "Discount Rates," NBER Working Papers 16972, National Bureau of Economic Research, Inc.

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