Time-variation in the value premium and the CAPM : evidence from European markets

Many previous studies document a robust premium for value versus growth stocks in international markets. We show that this premium is driven by few years where High Minus Low (HML) returns are high and significant. For instance, for 12 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 βs for value and growth portfolios vary significantly over time, change between good and bad economic conditions, and that value portfolio βs are not always smaller than growth portfolio βs 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 Capital Asset Pricing Model (CAPM).