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Measuring the Persistence of Expected Returns

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  • Campbell, John Y

Abstract

This paper summarizes earlier research On the sources of variation in monthly U.S. stock returns in the period 1927-88. A log-linear model is used to break unexpected returns into changing expectations about future dividends and changing expectations about future returns. Even though stock returns are not highly forecastable, the model attributes one-third of the variation in returns to changing expected returns, one-third to changing future dividends, and one-third to the covariance between these components. Changing expected returns have a large effect on the stock market because their movements are persistent and negatively correlated with changing expected dividends.
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  • Campbell, John Y, 1990. "Measuring the Persistence of Expected Returns," American Economic Review, American Economic Association, vol. 80(2), pages 43-47, May.
  • Handle: RePEc:aea:aecrev:v:80:y:1990:i:2:p:43-47
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    1. Myung Jig Kim & Charles R. Nelson & Richard Startz, 1991. "Mean Reversion in Stock Prices? A Reappraisal of the Empirical Evidence," Review of Economic Studies, Oxford University Press, vol. 58(3), pages 515-528.
    2. John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 195-228.
    3. Campbell, John Y & Shiller, Robert J, 1988. " Stock Prices, Earnings, and Expected Dividends," Journal of Finance, American Finance Association, vol. 43(3), pages 661-676, July.
    4. Campbell, John Y, 1991. "A Variance Decomposition for Stock Returns," Economic Journal, Royal Economic Society, vol. 101(405), pages 157-179, March.
    5. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, vol. 22(1), pages 3-25, October.
    6. Poterba, James M. & Summers, Lawrence H., 1988. "Mean reversion in stock prices : Evidence and Implications," Journal of Financial Economics, Elsevier, vol. 22(1), pages 27-59, October.
    7. Shmuel Kandel & Robert F. Stambaugh, "undated". "Modeling Expected Stock Returns for Long and Short Horizons," Rodney L. White Center for Financial Research Working Papers 42-88, Wharton School Rodney L. White Center for Financial Research.
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    Cited by:

    1. Kwang Hun Choi & Chang‐Jin Kim & Cheolbeom Park, 2017. "Regime Shifts in Price‐Dividend Ratios and Expected Stock Returns: A Present‐Value Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(2-3), pages 417-441, March.
    2. Campbell, John Y, 1991. "A Variance Decomposition for Stock Returns," Economic Journal, Royal Economic Society, vol. 101(405), pages 157-179, March.
    3. Shiller, Robert J. & Beltratti, Andrea E., 1992. "Stock prices and bond yields : Can their comovements be explained in terms of present value models?," Journal of Monetary Economics, Elsevier, vol. 30(1), pages 25-46, October.
    4. Bekaert, Geert & Engstrom, Eric & Grenadier, Steven R., 2010. "Stock and bond returns with Moody Investors," Journal of Empirical Finance, Elsevier, vol. 17(5), pages 867-894, December.
    5. Anwar M. Shaikh, 1995. "The Stock Market and the Corporate Sector: Profit-Based Approach," Economics Working Paper Archive wp_146, Levy Economics Institute.
    6. Bekaert, Geert & Engstrom, Eric & Xing, Yuhang, 2009. "Risk, uncertainty, and asset prices," Journal of Financial Economics, Elsevier, vol. 91(1), pages 59-82, January.
    7. Sharma, Susan Sunila & Narayan, Paresh Kumar, 2022. "Technology shocks and stock returns: A long-term perspective," Journal of Empirical Finance, Elsevier, vol. 68(C), pages 67-83.
    8. Park, Donghyun & Xiao, Qin, 2009. "Housing Prices and the Role of Speculation: The Case of Seoul," ADB Economics Working Paper Series 146, Asian Development Bank.
    9. Hsu, Po-Hsuan, 2009. "Technological innovations and aggregate risk premiums," Journal of Financial Economics, Elsevier, vol. 94(2), pages 264-279, November.
    10. Hudepohl, Tom & van Lamoen, Ryan & de Vette, Nander, 2021. "Quantitative easing and exuberance in stock markets: Evidence from the euro area," Journal of International Money and Finance, Elsevier, vol. 118(C).
    11. Campbell, John Y & Ammer, John, 1993. "What Moves the Stock and Bond Markets? A Variance Decomposition for Long-Term Asset Returns," Journal of Finance, American Finance Association, vol. 48(1), pages 3-37, March.
    12. Peijie Wang, 2000. "Shock persistence in property and related markets," Journal of Property Research, Taylor & Francis Journals, vol. 17(1), pages 1-21, January.
    13. Georges Prat & Remzi Uctum, 2008. "The dynamics of ex-ante risk premia in the foreign exchange market: Evidence from the yen/usd exchange rate Using survey data," Working Papers hal-04140761, HAL.
    14. Oleg Rytchkov, 2012. "Filtering Out Expected Dividends and Expected Returns," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 2(03), pages 1-56.
    15. Rodríguez, Rosa & Restoy, Fernando & Peña, Juan Ignacio, 1997. "A general equilibrium approach to the stock returns and real activity relationship," DEE - Working Papers. Business Economics. WB 7028, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    16. Rodriguez, Rosa & Restoy, Fernando & Pena, J. Ignacio, 2002. "Can output explain the predictability and volatility of stock returns?," Journal of International Money and Finance, Elsevier, vol. 21(2), pages 163-182, April.
    17. Rapach, David E. & Wohar, Mark E. & Rangvid, Jesper, 2005. "Macro variables and international stock return predictability," International Journal of Forecasting, Elsevier, vol. 21(1), pages 137-166.
    18. Enrique Sentana, 1993. "The econometrics of the stock market I: rationality tests," Investigaciones Economicas, Fundación SEPI, vol. 17(3), pages 401-420, September.
    19. Hudepohl, Tom & van Lamoen, Ryan & de Vette, Nander, 2021. "Quantitative easing and exuberance in stock markets: Evidence from the euro area," Journal of International Money and Finance, Elsevier, vol. 118(C).
    20. Clapp, John M. & Giaccotto, Carmelo, 1998. "Residential Hedonic Models: A Rational Expectations Approach to Age Effects," Journal of Urban Economics, Elsevier, vol. 44(3), pages 415-437, November.
    21. Qin Xiao & Donghyun Park, 2010. "Seoul housing prices and the role of speculation," Empirical Economics, Springer, vol. 38(3), pages 619-644, June.

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