The Long Run Value Premium and Economic Activity

Black, Angela J.; McMillan, David G.

doi:10.2139/ssrn.303820

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The Long Run Value Premium and Economic Activity

Univ. of Aberdeen Acct. & Fin. Working Paper No. 02-05

22 Pages Posted: 1 Apr 2002

See all articles by Angela J. Black

Angela J. Black

University of Aberdeen - Business School

David G. McMillan

University of Stirling

Date Written: March 12, 2002

Abstract

Recent evidence suggests the existence of a non-stationary long-run value premium. This paper examines the links between this long-run value premium and movements in general economic activity, such that there may exist common movement. The evidence supports a single cointegrating vector between the long-run value premium, industrial production, inflation and interest rates. This suggests that the premium arises from general macroeconomic risk. The long-run relationships reveal that, for the US and UK, value stocks respond to changes in interest rates, while growth stocks respond to changes in output. The converse is found for Japan.

Keywords: Long-Run Value Premium, Cointegration, Interest Rates, Variance Decomposition

JEL Classification: C22, G12

Suggested Citation: Suggested Citation

Black, Angela J. and McMillan, David G., The Long Run Value Premium and Economic Activity (March 12, 2002). Univ. of Aberdeen Acct. & Fin. Working Paper No. 02-05, Available at SSRN: https://ssrn.com/abstract=303820 or http://dx.doi.org/10.2139/ssrn.303820