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Dividend Variability and Stock Market Swings

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Author Info
Evans, Martin D D

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Abstract

This paper examines the extent to which swings in stock prices can be related to variations in the discounted value of expected future dividends when investors face uncertainty about their future behavior. The author develops an econometric model that accounts for the instability of U.S. dividend growth and discount rates during the past 120 years. Estimates of the model reveal that changing forecasts of future dividend growth account for more than 90 percent of the predictable variations in dividend prices. The estimates also imply that instability in the dividend and discount rate processes contribute significantly to the predictability of long-horizon stock returns. Copyright 1998 by The Review of Economic Studies Limited.

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Publisher Info
Article provided by Blackwell Publishing in its journal Review of Economic Studies.

Volume (Year): 65 (1998)
Issue (Month): 4 (October)
Pages: 711-40
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Handle: RePEc:bla:restud:v:65:y:1998:i:4:p:711-40

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  1. Stephen G. Cecchetti & Pok-sang Lam & Nelson C. Mark, 2000. "Asset Pricing with Distorted Beliefs: Are Equity Returns Too Good to Be True?," American Economic Review, American Economic Association, vol. 90(4), pages 787-805, September. [Downloadable!] (restricted)
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  2. Mª Jose Gutierrez & Jesús Vazquez, 2003. "Switching equilibria. The Present Value Model for Stock Prices Revisited," DFAEII Working Papers 200226, University of the Basque Country - Department of Foundations of Economic Analysis II. [Downloadable!]
    Other versions:
  3. Massimiliano De Santis, 2005. "Movements in the Equity Premium: Evidence from a Bayesian Time-Varying VAR," Money Macro and Finance (MMF) Research Group Conference 2005 62, Money Macro and Finance Research Group. [Downloadable!]
  4. Massimiliano De Santis, 2007. "Movements in the Equity Premium: Evidence from a Time-Varying VAR," Studies in Nonlinear Dynamics & Econometrics, Berkeley Electronic Press, vol. 11(4). [Downloadable!]
  5. Ravi Bansal & A. Ronald Gallant & George Tauchen, 2007. "Rational Pessimism, Rational Exuberance, and Asset Pricing Models," NBER Working Papers 13107, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Juan M. Londoño & Marta Regulez & Jesús Vázquez, 2008. "Another Look to the Price-Dividend Ratio: A Markov-Switching Approach," DFAEII Working Papers 200809, University of the Basque Country - Department of Foundations of Economic Analysis II. [Downloadable!]
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