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A Stock Return Decomposition Using Observables

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Abstract

We propose a new method for decomposing realized stock market capital gains into contributions from changes to the real yield curve, equity premia, and expected dividends. The method centers on changes to observable inputs of the present value formula and requires no regressions or log-linearization. In S&P500 data for 2005-2023, changes to expected dividends dominated the cumulative capital gain. Changes to the real yield curve and equity premia contributed more to capital gain fluctuations. A mix of higher equity premia and lower expected earnings drove the 2008 and 2020 market declines, while higher real yields drove the 2022 market drop.

Suggested Citation

  • Benjamin Knox, 2022. "A Stock Return Decomposition Using Observables," Finance and Economics Discussion Series 2022-014r1, Board of Governors of the Federal Reserve System (U.S.), revised 31 Jan 2025.
    • Handle: RePEc:fip:fedgfe:2022-14
    DOI: 10.17016/FEDS.2022.014r1
    Note: (Revised January 2025)
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    References listed on IDEAS

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    Cited by:

    1. Christoph E. Boehm & Niklas Kroner, 2024. "Monetary Policy without Moving Interest Rates: The Fed Non-Yield Shock," International Finance Discussion Papers 1392, Board of Governors of the Federal Reserve System (U.S.).
    2. Ben Knox & Yannick Timmer, 2024. "Stagflationary Stock Returns," CESifo Working Paper Series 11236, CESifo.

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    More about this item

    Keywords

    Return decomposition; Stock Market; Duration; Asset pricing;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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