What Moves Equity Markets? A Term Structure Decomposition for Stock Returns

53 Pages Posted: 16 Aug 2019 Last revised: 11 Sep 2019

See all articles by Andrei Gonçalves

Andrei Gonçalves

University of North Carolina (UNC) at Chapel Hill - Finance Area

Date Written: May 31, 2019

Abstract

Several papers decompose stock returns into cash flow and discount rate news to study equity market fluctuations. This paper develops and explores an alternative decomposition for stock returns based on the idea that equity volatility must come from variation in the present value of short- and long-term dividends. I find that (i) more than 60% of equity volatility comes from dividends with maturities beyond 20 years and (ii) most of the return volatility associated with short-term dividends comes from cash flow shocks while discount rate news are mainly responsible for return volatility linked to long-term dividends.

Keywords: Equity Volatility, Campbell-Shiller Decomposition, Equity Term Structure, Dividend Strips

JEL Classification: E32, E43, G11, G12

Suggested Citation

Gonçalves, Andrei, What Moves Equity Markets? A Term Structure Decomposition for Stock Returns (May 31, 2019). Available at SSRN: https://ssrn.com/abstract=3436874 or http://dx.doi.org/10.2139/ssrn.3436874

Andrei Gonçalves (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

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