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Dividend Innovations and Stock Price Volatility

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  • West, Kenneth D

Abstract

A standard efficient markets model states that a stock price equals the expected present discounted valu e of its dividends, with a constant discount rate. This is shown to i mply that the variance of the innovation in the stock price is smalle r than that of a stock-price forecast made from a subset of the marke t's information set. The implication follows even if prices and divid ends require differencing to induce stationarity. The relation betwee n the variances appears not to hold for some annual U.S. stock-market data. The rejection of the model is both quantitatively and statisti cally significant. Copyright 1988 by The Econometric Society.

Suggested Citation

  • West, Kenneth D, 1988. "Dividend Innovations and Stock Price Volatility," Econometrica, Econometric Society, vol. 56(1), pages 37-61, January.
  • Handle: RePEc:ecm:emetrp:v:56:y:1988:i:1:p:37-61
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