Analytical cyclical price–dividend ratios

Fausto Mignanego and Alessandro Sbuelz

Economics Letters, 2022, vol. 215, issue C

Abstract: How non-linear are exact log price–dividend ratios in the fundamental state variables? We work out in continuous time a novel exact formula for the log price–dividend ratio to study how much non-linearity is generated by the persistence of an exogenous mean-reverting and homoskedastic state variable. Our pricing formula highlights that persistence fosters endogenous conditional heteroskedasticity of the stock returns by fueling the non-linearity of the log price–dividend ratio.

Keywords: Price–dividend ratio; Long-run risk; Non-linearity; Endogenous heteroskedasticity; Log-linear approximation (search for similar items in EconPapers)
JEL-codes: C02 C60 D53 E32 E44 G10 G12 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:215:y:2022:i:c:s016517652200132x

DOI: 10.1016/j.econlet.2022.110510

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