Assessing the Structural Change in the Aggregate Earnings-Returns Relation

38 Pages Posted: 5 Feb 2020

See all articles by Asher Curtis

Asher Curtis

University of Washington

Chang‐Jin Kim

University of Washington

Hyung Il Oh

University of Washington, Bothell

Date Written: January 12, 2020

Abstract

We investigate the change in the aggregate earnings-returns relation from negative to positive. We first identify a gradual structural break around the second quarter of 1991. We then find evidence of three contributing factors to the change in the relation. They are: i) an increase in the relative importance of cash flow news in returns; ii) a decrease in the importance of discount rate news contained in unexpected aggregate earnings, which together increased the covariance between unexpected earnings and returns; and iii) a decrease in the persistence of expected aggregate earnings and expected returns which decreased the absolute value of the covariance between expected earnings and returns.

Keywords: Aggregate Earnings-Returns Relation, Structural Change, Discount Rate News, Cash Flow News, Persistence, Great Moderation

JEL Classification: E31, E32, G12, G14, M41

Suggested Citation

Curtis, Asher and Kim, Chang‐Jin and Oh, Hyung Il, Assessing the Structural Change in the Aggregate Earnings-Returns Relation (January 12, 2020). Available at SSRN: https://ssrn.com/abstract=3517952 or http://dx.doi.org/10.2139/ssrn.3517952

Asher Curtis

University of Washington ( email )

Seattle, WA 98195
United States

Chang‐Jin Kim

University of Washington

Hyung Il Oh (Contact Author)

University of Washington, Bothell ( email )

18115 Campus Way NE
Bothell, WA 98011
United States

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