Since the value premium was originally outlined by Eugene Fama and Kenneth French in the early 1990s, has it declined or disappeared in the U.S. stock market?

The renowned economists have released a new paper examining the value premium’s performance between July 1963 and June 2019. They decided to revisit the topic because the value premium has been low for a while, says Fama, the Robert R. McCormick distinguished service professor of finance at the University of Chicago’s Booth School of Business. “We wanted to see what that meant.”

The paper confirms that value premiums, which are value portfolio returns in excess of market portfolio returns, have been, on average, much lower in the past 28 years, compared to the period of 1963 to 1991.

In particular, the average premium for big value dropped from 0.36 per cent per month from 1963 to 1991 to 0.05 per cent for the period between 1991 and 2019. In addition, the small value average premium decreased from 0.58 per cent to 0.33 per cent.

The results weren’t surprising, says Fama. “We were surprised that it extended back as far as it did — that period of low returns — but otherwise not.”

However, the paper doesn’t suggest these comparisons mean the value premium has disappeared. Instead, high volatility in monthly premiums cloud inferences about whether the declines in average premiums reflect changes in expected premiums. “You can’t tell whether the value premium has gone away or not,” says Fama. “You can’t tell even whether it’s changed because of the statistical uncertainty associated with the returns.”

While the average value premiums are lower in the second half of the timeframe, U.S. value stocks produced higher average returns than the market portfolio of all listed U.S. stocks across the entire period. “In this situation, the full sample arguably provides the best evidence on long-term expected premiums,” the paper said. “The lower average premiums of the second half lean against the strong average premiums of the first, but full-period average value premiums provide statistically reliable evidence of positive expected premiums.”