Testing the Present Value Model of Farmland Prices

Barry Falk

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: This paper examines the adequacy of the constant expected returns version of the present value model of farm real estate and rent data over a 1921-1985 sample period. The nature of the model's failure to explain these data is remarkably similar to the kind of model failure that Campbell and Shiller [1987] uncovered in their study of U.S. stock market price and dividend time series. More specifically, real farmland prices tend to overreact to movements in real cash rents, falling much too far during periods of declining rents and rising much too far during periods of increasing rents.

Date: 1989-02-01
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