Value versus Growth: Time‐Varying Expected Stock Returns |
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| Authors: | Huseyin Gulen Yuhang Xing Lu Zhang |
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| Affiliation: | 1. Huseyin Gulen is an Associate Professor of Finance at Purdue University in West Lafayette, IN.;2. Yuhang Xing is an Associate Professor of Finance at Rice University in Houston, TX.;3. Lu Zhang is the Dean's Distinguished Chair in Finance and Professor of Finance at The Ohio State University in Columbus, OH and a Research Associate at National Bureau of Economic Research in Boston, MA. |
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| Abstract: | ![]()
Is the value premium predictable? We study time variations of the expected value premium using a two‐state Markov switching model. We find that when conditional volatilities are high, the expected excess returns of value stocks are more sensitive to aggregate economic conditions than the expected excess returns of growth stocks. As a result, the expected value premium is time varying. It spikes upward in the high volatility state, only to decline more gradually in the subsequent periods. However, out‐of‐sample predictability of the value premium is close to nonexistent. |
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