Real quarterly returns to shares and 3-month Treasury Bills are plotted in Figure 3 and summarized in Table 2. The share returns are given for the UK 500 share index. The main facts about the returns on shares and T-bills are not surprising. Over the period as a whole, as in the US, the share returns are substantially higher and more volatile than the returns on Treasury Bills. Given the large changes in share ownership that occurred during the mid 1980s, it is interesting to consider the behaviour of asset returns before and after these changes. The stock market crash of 1987 constitutes a natural breaking point both because it occurs at the end of the increase in ownership and because it allows us to define two periods that are not affected by a single large observation.
The excess return on shares is considerably lower in the second half of the period than in the first half. Also, share returns are slighdy less volatile post 1987: both the standard error of real returns and that of excess returns are lower after the stock market crash. While the size of the two sample periods considered is too short to obtain any precise estimates of mean and variances of returns, other differences are also apparent. While the total variability of returns is lower after the increase in stock market participation, movements in returns and excess returns are less predictable. The R2 of a simple OLS regression using lagged variables, such as share returns, T-bill returns, inflation rates and interest rate spreads is reduced from around 0.15 before 1987ql to around 0.05 after 1987q4.
Average quarterly returns