Graduate School of Business, University of Chicago. The comments of Bradford Cornell, David Mayers, Merton Miller, Kevin Murphy, G. William Schwert, Rex Sinquefield, René Stulz, and especially Kenneth French are gratefully acknowledged. This research is supported by the National Science Foundation.
Stock Returns, Expected Returns, and Real Activity
Article first published online: 30 APR 2012
1990 The American Finance Association
The Journal of Finance
Volume 45, Issue 4, pages 1089–1108, September 1990
How to Cite
FAMA, E. F. (1990), Stock Returns, Expected Returns, and Real Activity. The Journal of Finance, 45: 1089–1108. doi: 10.1111/j.1540-6261.1990.tb02428.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
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.