Measuring the Persistence of Expected Returns

14 Pages Posted: 3 Jul 2007 Last revised: 15 Jul 2022

See all articles by John Y. Campbell

John Y. Campbell

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: March 1990

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.

Suggested Citation

Campbell, John Y., Measuring the Persistence of Expected Returns (March 1990). NBER Working Paper No. w3305, Available at SSRN: https://ssrn.com/abstract=468826

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