TY  - JOUR
AU  - Vuolteenaho,Tuomo
TI  - What Drives Firm-Level Stock Returns?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8240
PY  - 2001
Y2  - April 2001
UR  - http://www.nber.org/papers/w8240
L1  - http://www.nber.org/papers/w8240.pdf
N1  - Author contact info:
Tuomo Vuolteenaho
Arrowstreet Capital
200 Clarendon Street #30
Boston, MA 02116-5021
Tel: 617/496-6284
Fax: 617/495-8570
E-Mail: tvuolteenaho@arrowstreetcapital.com
AB  - I use a vector autoregressive model (VAR) to decompose an individual firm's stock return into two components: changes in cash-flow expectations (i.e., cash-flow news) and changes in discount rates (i.e., expected-return news). The VAR yields three main results. First, firm-level stock returns are mainly driven by cash-flow news. For a typical stock, the variance of cash-flow news is more than twice that of expected-return news. Second, shocks to expected returns and cash flows are positively correlated for a typical small stock. Third, expected-return-news series are highly correlated across firms, while cash-flow news can largely be diversified away in aggregate portfolios.
ER  -