Price Dividend Ratio and Long-Run Stock Returns: A Score-Driven State Space Model

Davide Delle Monache, Ivan Petrella and Fabrizio Venditti

Journal of Business & Economic Statistics, 2021, vol. 39, issue 4, 1054-1065

Abstract: Abstract–In this article, we develop a general framework to analyze state space models with time-varying system matrices, where time variation is driven by the score of the conditional likelihood. We derive a new filter that allows for the simultaneous estimation of the state vector and of the time-varying matrices. We use this method to study the time-varying relationship between the price dividend ratio, expected stock returns and expected dividend growth in the United States since 1880. We find a significant increase in the long-run equilibrium value of the price dividend ratio over time, associated with a fall in the long-run expected rate of return on stocks. The latter can be attributed mainly to a decrease in the natural rate of interest, as the long-run risk premium has only slightly fallen.

Date: 2021
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Citations: View citations in EconPapers (4)

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Working Paper: Price dividend ratio and long-run stock returns: a score driven state space model (2020)
Working Paper: Price dividend ratio and long-run stock returns: a score driven state space model (2020)
Working Paper: Price Dividend Ratio and Long-Run Stock Returns: a Score Driven State Space Model (2019)
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DOI: 10.1080/07350015.2020.1763805

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