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Explaining the Variance of Price Dividend Ratios

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  • John H. Cochrane

Abstract

This paper presents a bound on the variance of the price-dividend ratio and a decomposition of the variance of the price-dividend ratio into components that reflect variation in expected future discount rates and variation in expected future dividend growth. Unobserved discount rates needed to make the variance bound and variance decomposition hold are characterized, and the variance bound and variance decomposition are tested for several discount rate models, including the consumption based model, and models based on interest rates plus a constant risk premium.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3157.

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Date of creation: Jul 1992
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Publication status: published as The Review of Financial Studies, Vol. 5, No. 2, pp. 243-280, (1992).
Handle: RePEc:nbr:nberwo:3157

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