For helpful comments we thank Murray Carlson (AFA discussant), Sreedhar Bharath, Amy Dittmar, Evan Dudley, Philip Joos, Solomon Tadesse, Joanna Wu, and seminar participants at the American Finance Association Annual Meetings. Bill Christie (Editor) and two anonymous referees deserve special thanks. This paper supersedes our previous work titled “Value versus Growth: Movements in Economic Fundamentals.” All remaining errors are our own.
Value versus Growth: Time-Varying Expected Stock Returns
Article first published online: 23 JUN 2011
© 2011 Financial Management Association International
Volume 40, Issue 2, pages 381–407, Summer 2011
How to Cite
Gulen, H., Xing, Y. and Zhang, L. (2011), Value versus Growth: Time-Varying Expected Stock Returns. Financial Management, 40: 381–407. doi: 10.1111/j.1755-053X.2011.01146.x
- Issue published online: 23 JUN 2011
- Article first published online: 23 JUN 2011
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 subsequent periods. However, out-of-sample predictability of the value premium is close to nonexistent.