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Value versus Growth: Time-Varying Expected Stock Returns

Author

Listed:
  • Huseyin Gulen
  • Yuhang Xing
  • Lu Zhang

Abstract

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.

Suggested Citation

  • Huseyin Gulen & Yuhang Xing & Lu Zhang, 2010. "Value versus Growth: Time-Varying Expected Stock Returns," NBER Working Papers 15993, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:15993
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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