Get access

Value versus Growth: Time-Varying Expected Stock Returns


  • 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.


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.