The Expected Value Premium
Cheung Kong Graduate School of Business
Purdue University - Krannert School of Management
Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)
AFA 2007 Chicago Meetings Paper
Ross School of Business Paper No. 1049
Fama and French (2002) estimate the equity premium using dividend growth rates to measure expected rates of capital gain. We use a similar method to study the value premium. From 1941 to 2005, the expected HML return is on average 6.0% per annum, consisting of an expected dividend-growth component of 4.4% and an expected dividend-price-ratio component of 1.6%. The expected HML return is also countercyclical: a positive, one-standard-deviation shock to real consumption growth lowers this premium by about 0.40%. Unlike the equity premium, there is only mixed evidence suggesting that the expected value premium has declined over time.
Number of Pages in PDF File: 39
Keywords: The Value Premium, Expected Returns, Dividend Growth, Dividend Price Ratio
JEL Classification: G12, G14
Date posted: March 13, 2006
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