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The Expected Value Premium

39 Pages Posted: 13 Mar 2006  

Long Chen

Cheung Kong Graduate School of Business

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 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 )

Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China

Ralitsa Petkova

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

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States

Lu Zhang (Contact Author)

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
585-267-6250 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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