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Value versus Growth: Time-Varying Expected Stock Returns

  • Huseyin Gulen
  • Yuhang Xing
  • Lu Zhang

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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15993.

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Date of creation: May 2010
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Publication status: published as Huseyin Gulen & Yuhang Xing & Lu Zhang, 2011. "Value versus Growth: Time‐Varying Expected Stock Returns," Financial Management, Financial Management Association International, vol. 40(2), pages 381-407, 06.
Handle: RePEc:nbr:nberwo:15993
Note: AP CF
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