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Stock Returns, Expected Returns, and Real Activity

Eugene F. Fama
The Journal of Finance
Vol. 45, No. 4 (Sep., 1990), pp. 1089-1108
Published by: Wiley for the American Finance Association
DOI: 10.2307/2328716
Stable URL: http://www.jstor.org/stable/2328716
Page Count: 20
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Stock Returns, Expected Returns, and Real Activity
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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% 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.

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