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Dividend Variability and Stock Market Swings

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  • Evans, Martin D D

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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Bibliographic Info

Article provided by Wiley Blackwell 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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Cited by:
  1. 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.
  2. 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.
  3. Vázquez Pérez, Jesús & Regúlez Castillo, Marta & Londoño Yarce, Juan Miguel, 2008. "Another Look to the Price-Dividend Ratio: A Markov-Switching Approach," DFAEII Working Papers 2008-09, University of the Basque Country - Department of Foundations of Economic Analysis II.
  4. Pok-sang Lam & Stephen G. Cecchetti & 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.
  5. Martin D. D. Evans, 2003. "Real risk, inflation risk, and the term structure," Economic Journal, Royal Economic Society, vol. 113(487), pages 345-389, 04.
  6. Gutierrez, Maria-Jose & Vazquez, Jesus, 2004. "Switching equilibria: the present value model for stock prices revisited," Journal of Economic Dynamics and Control, Elsevier, vol. 28(11), pages 2297-2325, October.
  7. Rosser, J. Jr. & Ahmed, Ehsan & Hartmann, Georg C., 2003. "Volatility via social flaring," Journal of Economic Behavior & Organization, Elsevier, vol. 50(1), pages 77-87, January.
  8. Shively, Philip A., 2007. "Asymmetric temporary and permanent stock-price innovations," Journal of Empirical Finance, Elsevier, vol. 14(1), pages 120-130, January.
  9. Engsted, Tom, 2002. " Measures of Fit for Rational Expectations Models," Journal of Economic Surveys, Wiley Blackwell, vol. 16(3), pages 301-55, July.

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