The Expected Value Premium

39 Pages Posted: 13 Mar 2006

See all articles by Long Chen

Long Chen

Cheung Kong Graduate School of Business; Luohan Academy

Ralitsa Petkova

Case Western Reserve University - Department of Banking & Finance

Lu Zhang

Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: September 2006

Abstract

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

Chen, Long and 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

Long Chen

Cheung Kong Graduate School of Business ( email )

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Ralitsa Petkova

Case Western Reserve University - Department of Banking & Finance ( email )

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Lu Zhang (Contact Author)

Ohio State University - Fisher College of Business ( email )

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National Bureau of Economic Research (NBER)

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