Explaining Returns with Cash-Flow Proxies / Peter Hecht, Tuomo Vuolteenaho.

Format:

Book

Author/Creator:

Hecht, Peter.

Contributor:

National Bureau of Economic Research.

Vuolteenaho, Tuomo.

Series:

Working Paper Series (National Bureau of Economic Research) no. w11169.

NBER working paper series no. w11169

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2005.

Summary:

Stock returns are correlated with contemporaneous earnings growth, dividend growth, future real activity, and other cash-flow proxies. The correlation between cash-flow proxies and stock returns may arise from association of cash-flow proxies with one-period expected returns, cash-flow news, and/or expected-return news. We use Campbell's (1991) return decomposition to measure the relative importance of these three effects in regressions of returns on cash-flow proxies. In some of the popular specifications, variables that are motivated as proxies for cash-flow news also track a nontrivial proportion of one-period expected returns and expected-return news. As a result, the R2 from a regression of returns on cash-flow proxies may overstate or understate the importance of cash-flow news as a source of return variance.

Notes:

Print version record

March 2005.