Investing Blog Roundup: Fama French Value Premium Update
February 7, 2020
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Eugene Fama and Kenneth French recently released a new paper looking at the value premium (i.e., the additional returns earned by stocks with high book-to-market ratios — “value” stocks — relative to the overall stock market).
The point of the paper was to determine whether the expected value premium declined or disappeared after the publication of their initial papers on the topic in 1992 and 1993.
That is, the value premium has been quite a bit lower since the publication of their papers. But there’s a question of whether that was because:
The expected premium has declined/disappeared, or
The expected premium is still there, but the random nature of the stock market happened to result in a lower premium (in much the same way that stocks have an expected risk premium relative to bonds, but over any particular period they may not actually earn more).
“The high volatility of monthly value premiums clouds inferences about whether the declines in average premiums reflect changes in expected premiums. Comparing the first and second half-period averages, we don’t come close to rejecting the hypothesis that out-of-sample expected premiums are the same as in-sample expected premiums. But the imprecision of the estimates implies that we also can’t reject a wide range of lower values for second half expected premiums.”
In other words, “we don’t really know.” The value premium is sufficiently volatile that we can’t say conclusively whether the expected value premium has declined or not.