What Drives Firm-Level Stock Returns? / Tuomo Vuolteenaho.

Format:

Book

Author/Creator:

Vuolteenaho, Tuomo.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w8240.

NBER working paper series no. w8240

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2001.

Summary:

I use a vector autoregressive model (VAR) to decompose an individual firm's stock return into two components: changes in cash-flow expectations (i.e., cash-flow news) and changes in discount rates (i.e., expected-return news). The VAR yields three main results. First, firm-level stock returns are mainly driven by cash-flow news. For a typical stock, the variance of cash-flow news is more than twice that of expected-return news. Second, shocks to expected returns and cash flows are positively correlated for a typical small stock. Third, expected-return-news series are highly correlated across firms, while cash-flow news can largely be diversified away in aggregate portfolios.

Notes:

Print version record

April 2001.