TY  - JOUR
AU  - Campbell,John Y.
TI  - A Variance Decomposition for Stock Returns
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 3246
PY  - 1991
Y2  - September 1991
UR  - http://www.nber.org/papers/w3246
L1  - http://www.nber.org/papers/w3246.pdf
N1  - Author contact info:
John Y. Campbell
Morton L. and Carole S.
Olshan Professor of Economics
Department of Economics
Harvard University
Littauer Center 213
Cambridge, MA 02138
Tel: 617/496-6448
Fax: 617/495-7730
E-Mail: john_campbell@harvard.edu
AB  - 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.
ER  -