An evolutionary explanation of the value premium puzzle
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As early as 1934 Graham and Dodd conjectured that excess returns from value investment originate from a tendency of stock prices to converge towards a fundamental value. This paper confirms their insights within the evolutionary finance model of Evstigneev et al. (Econ Theory 27:449–468, (Evstigneev et al. 2006)). Our empirical results show the predictive power of the evolutionary benchmark valuation for the relative market capitalization and its dynamics in the sample of firms listed in the Dow Jones Industrial Average index in 1981–2009.
KeywordsValue premium Evolutionary finance
JEL ClassificationG12 D53
Financial support by the National Centre of Competence in Research “Financial Valuation and Risk Management” is gratefully acknowledged. Terje Lensberg and Klaus Reiner Schenk-Hoppé also thank the Norwegian Finance Market Fund for financial support (project “Stability of Financial Markets: An Evolutionary Approach”).
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