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Expected returns on value, growth, and HML

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  • Rytchkov, Oleg

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.

Suggested Citation

  • Rytchkov, Oleg, 2010. "Expected returns on value, growth, and HML," Journal of Empirical Finance, Elsevier, vol. 17(4), pages 552-565, September.
  • Handle: RePEc:eee:empfin:v:17:y:2010:i:4:p:552-565
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Fukuta, Yuichi & Yamane, Akiko, 2015. "Value premium and implied equity duration in the Japanese stock market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 39(C), pages 102-121.
    2. 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.
    3. Shynkevich, Andrei, 2012. "Short-term predictability of equity returns along two style dimensions," Journal of Empirical Finance, Elsevier, pages 675-685.

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