IDEAS home Printed from https://ideas.repec.org/a/oup/rfinst/v22y2009i12p5213-5249.html
   My bibliography  Save this article

Return Decomposition

Author

Listed:
  • Long Chen
  • Xinlei Zhao

Abstract

A crucial issue in asset pricing is to understand the relative importance of discount rate (DR) news and cash flow (CF) news in driving the time-series and cross-sectional variations of stock returns. Many studies directly estimate the DR news but back out the CF news as the residual. We argue that this approach has a serious limitation because the DR news cannot be accurately measured due to the small predictive power, and the CF news, as the residual, inherits the large misspecification error of the DR news. We apply this residual-based decomposition approach to Treasury bonds and equities and find results that are either counterintuitive or unrobust. Potential solutions, including modeling both DR news and CF news directly, the Bayesian model averaging approach, and the principal component analysis, are explored. The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

Suggested Citation

  • Long Chen & Xinlei Zhao, 2009. "Return Decomposition," The Review of Financial Studies, Society for Financial Studies, vol. 22(12), pages 5213-5249, December.
    • Handle: RePEc:oup:rfinst:v:22:y:2009:i:12:p:5213-5249
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/rfs/hhp017
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:rfinst:v:22:y:2009:i:12:p:5213-5249. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://edirc.repec.org/data/sfsssea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.