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Stock Returns, Expected Returns, and Real Activity

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  • Fama, Eugene F

Abstract

Measuring the total return variation explained by shocks to expected cash flows, time-varying expected returns, and shocks to expected returns is one way to judge the rationality of stock prices. Variables that proxy for expected returns and expected-return shocks capture 30 percent of the variance of annual NYSE value-weighted returns. Growth rates of production, used to proxy for shocks to expected cash flows, explain 43 percent of the return variance. Whether the combined explanatory power of the variables--about 58 percent of the variance of annual returns--is good or bad news about market efficiency is left for the reader to judge. Copyright 1990 by American Finance Association.

Suggested Citation

  • Fama, Eugene F, 1990. "Stock Returns, Expected Returns, and Real Activity," Journal of Finance, American Finance Association, vol. 45(4), pages 1089-1108, September.
    • Handle: RePEc:bla:jfinan:v:45:y:1990:i:4:p:1089-1108
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