Working Paper Revision

A Stock Return Decomposition Using Observables

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.

JEL Classification: G10; G12; G14;

https://doi.org/10.17016/FEDS.2022.014r1

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2025-01-31

Number: 2022-014r1

Note: (Revised January 2025)

Related Works

• Working Paper Revision (2025-01-31) : You are here.
• Working Paper Original (2022-03-23) : A Stock Return Decomposition Using Observables