This paper shows that unexpected stock returns must be associated with changes in
expected future dividends or expected future returns A vector autoregressive method
is used to break unexpected stock returns into these two components. In U.S. monthly
data in 1927-88, one-third of the variance of unexpected returns is attributed to the
variance of changing expected dividends, one-third to the variance of changing expected
returns, and one-third to the covariance of the two components. Changing expected
returns have a large effect on stock prices because they are persistent: a 1% innovation
in the expected return is associated with a 4 or 5% capital loss. Changes in expected
returns are negatively correlated with changes in expected dividends, increasing the
stock market reaction to dividend news. In the period 1952-88, changing expected.
returns account for a larger fraction of stock return variation than they do in the
In order to set up a list of libraries that you have access to,
you must first login
or sign up.
Then set up a personal list of libraries from your profile page by
clicking on your user name at the top right of any screen.