Time-Variation in the Value Premium and the CAPM: Evidence from European Markets

Abstract

Many previous studies document a robust premium for value vs. growth stocks in international markets. We show that this premium is driven by few years where HML returns are high and significant. For instance, for twelve European markets the HML return is statistically significant, on average, approximately 36% of the years and for these statistically significant years the average monthly HML return is 2.24%. For the rest of the years (i.e. about 64% of the time) the average HML monthly return is only 0.54%. We also find that historical betas for value and growth portfolios vary significantly over time, change between good and bad economic conditions, and that value portfolio betas are not always smaller than growth portfolio betas for the majority of the sample markets. Finally, when time-variation in systematic risk is addressed we cannot reject the zero-intercept hypothesis; i.e portfolio returns appear consistent with the CAPM.