Title: A stock return decomposition using observables
Authors: Benjamin Knox - Federal Reserve Board (United States) [presenting]
Abstract: A method is proposed to decompose realized stock returns period by period. First, we argue that one can directly estimate expected stock returns from securities available in modern financial markets (using the real yield curve and a given equity risk premium). Second, we derive a return decomposition which is based on stock price elasticities with respect to expected returns and expected dividends, where elasticities can be calculated from dividend futures. An application to the COVID crisis in 2020 reveals that risk premium changes drove much of the crash and rebound in the S\&P500 while a fall in long-term real yields drove a strong positive return for 2020 as a whole.