Zero HML (and Zero Interest Rates)
Authors: Liu Liu (SAFE)
Title: Zero HML (and Zero Interest Rates)
Abstract: I found that over the past nine years from 2008m10 to 2017m09, the HML return, i.e., the difference between the returns on high book-to-market (value) and low book-to-market (growth) stocks, is on average zero, in contrast to a value premium of 5% per annum since 1963. The zero HML period is characterised by a regime where the HML return has a positive exposure to the market return and a low positive exposure to the return on high dividend yield stocks. The probability of being in this regime is negatively correlated with nominal interest rates. These findings are consistent with a reach for dividend behaviour in a low interest rate environment.