What Drives Firm-Level Stock Returns?

58 Pages Posted: 29 Nov 1999

See all articles by Tuomo Vuolteenaho

Tuomo Vuolteenaho

Arrowstreet Capital, LP; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: October 25, 1999

Abstract

I use a simple vector autoregressive (VAR) model to decompose a typical firm's stock return into two components: changes in cash-flow expectations (i.e., cash-flow news) and changes in discount rates (i.e., expected-return news). The VAR model yields three main results. First, firm-level stock returns are mainly driven by cash-flow news. For a typical stock, the variance of cash-flow news is more than twice that of expected-return news. Second, expected-return news series are highly correlated across firms, while cash-flow news can largely be diversified away in aggregate portfolios. Third, shocks to expected returns and cash flows are, perhaps surprisingly, positively correlated for a typical small stock. This positive correlation is inconsistent with a simple overreaction story suggesting that small-stock investors overreact to positive cash-flow news and thereby drive expected returns down.

JEL Classification: G12, G14

Suggested Citation

Vuolteenaho, Tuomo, What Drives Firm-Level Stock Returns? (October 25, 1999). EFA Working Paper No. 0072. Available at SSRN: https://ssrn.com/abstract=190812 or http://dx.doi.org/10.2139/ssrn.190812

Tuomo Vuolteenaho (Contact Author)

Arrowstreet Capital, LP ( email )

44 Brattle St., 5th Floor
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
1,637
rank
8,948
Abstract Views
5,548
PlumX Metrics