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Stock Returns, Expected Returns, and Real Activity
Author(s) -
FAMA EUGENE F.
Publication year - 1990
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1990.tb02428.x
Subject(s) - economics , econometrics , proxy (statistics) , stock (firearms) , explanatory power , expected return , cash flow , rate of return , financial economics , variance (accounting) , portfolio , mathematics , statistics , finance , mechanical engineering , philosophy , accounting , epistemology , engineering
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% of the variance of annual NYSE value‐weighted returns. Growth rates of production, used to proxy for shocks to expected cash flows, explain 43% of the return variance. Whether the combined explanatory power of the variables—about 58% of the variance of annual returns—is good or bad news about market efficiency is left for the reader to judge.