The Expected Value Premium
Fama and French (2002) estimate the equity premium using dividend growth rates to measure the expected rate of capital gain. We use similar methods to study the value premium. From 1941 to 2002, the expected HML return is on average 5.1% per annum, consisting of an expected-dividend-growth component of 3.5% and an expected-dividend-to-price component of 1.6%. The ex-ante HML return is also countercyclical: a positive, one-standard-deviation shock to real consumption growth rate lowers this premium by about 0.45%. Unlike the equity premium, there is only mixed evidence suggesting that the value premium has declined over time.
Chen: Department of Finance, Eli Broad College of Business, Michigan State University, 327 Eppley Center, East Lansing, MI 48823; tel: (517)353-2955, fax: (517)432-1080, email: email@example.com. Petkova: Department of Banking and Finance, Weatherhead School of Management, Case Western Reserve University, 10900 Euclid Avenue, Cleveland OH 44106; tel: (216)368-8553, email: Ralitsa.Petkova@case.edu. Zhang: Carol Simon Hall 3-160B, Simon School of Business, University of Rochester, 500 Wilson Boulevard, Rochester, NY 14627; tel: (585)275-3491, fax: (585)273-1140, email: firstname.lastname@example.org. We acknowledge helpful comments from Denitza Gintcheva and seminar participants at Kent State University and Case Western Reserve University.