NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

A Variance Decomposition for Stock Returns

John Y. Campbell

NBER Working Paper No. 3246 (Also Reprint No. r1615)
Issued in January 1990
NBER Program(s):   ME

This paper shows that unexpected stock returns must be associated with changes in expected future dividends or expected future returns A vector autoregressive method is used to break unexpected stock returns into these two components. In U.S. monthly data in 1927-88, one-third of the variance of unexpected returns is attributed to the variance of changing expected dividends, one-third to the variance of changing expected returns, and one-third to the covariance of the two components. Changing expected returns have a large effect on stock prices because they are persistent: a 1% innovation in the expected return is associated with a 4 or 5% capital loss. Changes in expected returns are negatively correlated with changes in expected dividends, increasing the stock market reaction to dividend news. In the period 1952-88, hanging expected. returns account for a larger fraction of stock return variation than they do in the period 1927-51.

download in pdf format
   (698 K)

email paper

This paper is available as PDF (698 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w3246

Published: The Economic Journal, Vol. 101, No. 405, pp. 157-179, (March 1991).

Users who downloaded this paper also downloaded these:
Campbell and Shiller w2511 Stock Prices, Earnings and Expected Dividends
Vuolteenaho w8240 What Drives Firm-Level Stock Returns?
Campbell and Ammer w3760 What Moves the Stock and Bond Markets? A Variance Decomposition for Long-Term Asset Returns
Campbell w4554 Understanding Risk and Return
Campbell and Vuolteenaho w9509 Bad Beta, Good Beta
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us