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Time-Variation in Expected Returns

Jennifer Conrad and Gautam Kaul
The Journal of Business
Vol. 61, No. 4 (Oct., 1988), pp. 409-425
Stable URL: http://www.jstor.org/stable/2352789
Page Count: 17
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Time-Variation in Expected Returns
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Abstract

This article characterizes the stochastic behavior of expected returns on common stock. We assume market efficiency and postulate an autoregressive process for conditional expected returns. We use weekly returns of 10 size-based portfolios over the 1962-85 period and find that (1) the variation through time in expected returns is well characterized by a stationary first-order autoregressive process: (2) the extracted expected returns explain a substantial proportion (up to 26%) of the variance in realized returns, and the magnitude of this proportion has a monotonic (inverse) relation with size; (3) the degree of variation in expected returns also changes systematically over time; and (4) the forecasts subsume the information in other potential predictor variables.

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