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The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors

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Abstract

A linearization of a rational expectations present value model for corporate stock prices produces a simple relation between the log dividend-price ratio and mathematical expectations of future log real dividend changes and future real discount rates. This relation can be tested using vector autoregressive methods. Three versions of the linearized model, differing in the measure of discount rates, are tested for United States time series 1981-1986: versions using real interest rate data. The results yield a metric to judge the relative importance of real dividend growth, measured real discount rates and unexplained factors in determining the dividend-price ratio.

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File URL: http://cowles.econ.yale.edu/P/cd/d08a/d0812.pdf
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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 812.

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Length: 39 pages
Date of creation: Dec 1986
Date of revision:
Publication status: Published in Review of Financial Studies (Fall 1988), 1: 195-228; also in Andrew W. Lo (ed.), Market Efficiency: Stock Market Behavior in Theory and Practice, Edward Elgar, 1996
Handle: RePEc:cwl:cwldpp:812

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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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Keywords: Dividend-Price ratio; rational expectations; present value; vector autoregression; dividends; stock prices; discount rate;

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  20. N. Gregory Mankiw & Julio J. Rotemberg & Lawrence H. Summers, 1982. "Intertemporal Substitution in Macroeconomics," NBER Working Papers 0898, National Bureau of Economic Research, Inc.
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  23. West, Kenneth D, 1988. "Dividend Innovations and Stock Price Volatility," Econometrica, Econometric Society, vol. 56(1), pages 37-61, January.
  24. Peter C.B. Phillips & Steven N. Durlauf, 1985. "Multiple Time Series Regression with Integrated Processes," Cowles Foundation Discussion Papers 768, Cowles Foundation for Research in Economics, Yale University.
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