NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Value versus Growth: Time-Varying Expected Stock Returns

Huseyin Gulen, Yuhang Xing, Lu Zhang

NBER Working Paper No. 15993
Issued in May 2010
NBER Program(s):   AP   CF

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 ensuring periods. However, out-of-sample predictability of the value premium is close to nonexistent.

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Document Object Identifier (DOI): 10.3386/w15993

Published: Huseyin Gulen & Yuhang Xing & Lu Zhang, 2011. "Value versus Growth: Time‐Varying Expected Stock Returns," Financial Management, Financial Management Association International, vol. 40(2), pages 381-407, 06.

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