Stock Returns, Expected Returns, and Real Activity

Eugene Fama ()

Journal of Finance, 1990, vol. 45, issue 4, 1089-1108

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.

Date: 1990
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