A Stock Return Decomposition Using Observables

Benjamin Knox
Authors registered in the RePEc Author Service: Annette Vissing-Jorgensen

No 2022-014r1, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We propose a new method for decomposing realized stock market capital gains into contributions from changes to the real yield curve, equity premia, and expected dividends. The method centers on changes to observable inputs of the present value formula and requires no regressions or log-linearization. In S&P500 data for 2005-2023, changes to expected dividends dominated the cumulative capital gain. Changes to the real yield curve and equity premia contributed more to capital gain fluctuations. A mix of higher equity premia and lower expected earnings drove the 2008 and 2020 market declines, while higher real yields drove the 2022 market drop.

Keywords: Return decomposition; Stock Market; Duration; Asset pricing (search for similar items in EconPapers)
JEL-codes: G10 G12 G14 (search for similar items in EconPapers)
Pages: 74 p.
Date: 2022-03-23, Revised 2025-01-31
New Economics Papers: this item is included in nep-fmk, nep-ifn and nep-rmg
Note: (Revised January 2025)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2022-14

DOI: 10.17016/FEDS.2022.014r1

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