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Measuring the Persistence of Expected Returns

  • John Y. Campbell

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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File URL: http://www.nber.org/papers/w3305.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3305.

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Date of creation: Mar 1990
Date of revision:
Publication status: published as The American Economic Review, Vol. 80, No. 2, pp. 43-47, (May 1990).
Handle: RePEc:nbr:nberwo:3305
Note: ME
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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  1. John Y. Campbell & Robert J. Shiller, 1986. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," NBER Working Papers 2100, National Bureau of Economic Research, Inc.
  2. John Y. Campbell & Robert J. Shiller, 1988. "Stock Prices, Earnings and Expected Dividends," NBER Working Papers 2511, National Bureau of Economic Research, Inc.
  3. Campbell, John, 1991. "A Variance Decomposition for Stock Returns," Scholarly Articles 3207695, Harvard University Department of Economics.
  4. Myung Jig Kim & Charles R. Nelson & Richard Startz, 1988. "Mean Reversion in Stock Prices? A Reappraisal of the Empirical Evidence," NBER Working Papers 2795, National Bureau of Economic Research, Inc.
  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. Shmuel Kandel & Robert F. Stambaugh, . "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.
  7. 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.
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