39 Pages Posted: 13 Mar 2006
Date Written: September 2006
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.
Keywords: The Value Premium, Expected Returns, Dividend Growth, Dividend Price Ratio
JEL Classification: G12, G14
Suggested Citation: Suggested Citation
Chen, Long and Petkova, Ralitsa and Zhang, Lu, The Expected Value Premium (September 2006). AFA 2007 Chicago Meetings Paper; Ross School of Business Paper No. 1049. Available at SSRN: https://ssrn.com/abstract=890120 or http://dx.doi.org/10.2139/ssrn.890120