Working Paper: NBER ID: w12183
Authors: Long Chen; Ralitsa Petkova; Lu Zhang
Abstract: 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.
Keywords: Value Premium; Expected Returns; Cash Flow Fundamentals
JEL Codes: G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| real consumption growth (F62) | expected HML return (G17) |
| real investment growth (E22) | expected HML return (G17) |
| default spread (D39) | expected HML return (G17) |
| growth rate of real investment (E22) | expected HML return (G17) |