Low-Frequency Movements in Stock Prices: A State-Space Decomposition
Nathan Balke and
Mark Wohar
The Review of Economics and Statistics, 2002, vol. 84, issue 4, 649-667
Abstract:
Previous analyses have concluded that expectations of future excess stock returns rather than future real dividend growth or real interest rates are responsible for most of the volatility in stock prices. In this paper, we employ a state-space model to model the dynamics of the log price-dividend ratio along with long-term and short-term interest rates, real dividend growth, and inflation. The advantage of the state-space approach is that we can parsimoniously model the low-frequency movements present in the data. We find that, if one allows permanent changes, even though very small, in real dividend growth, real interest rates, and inflation-but not excess stock returns-then expectations of real dividend growth and real interest rates become significant contributors to fluctuations in stock prices. However, we also show that stock price decompositions are very sensitive to assumptions about which unobserved market fundamentals have a permanent component. When we allow excess stock returns to have a permanent component but not real dividend growth, excess stock returns become an important contributor to stock price movements, whereas real dividend growth does not. Unfortunately, the data is not particularly informative about which of these alternative models is more likely. © 2002 President and Fellows of Harvard College and the Massachusetts Institute of Technology.
Date: 2002
References: Add references at CitEc
Citations: View citations in EconPapers (69)
Downloads: (external link)
http://www.mitpressjournals.org/doi/pdf/10.1162/003465302760556477 link to full text (application/pdf)
Access to full text is restricted to subscribers.
Related works:
Working Paper: Low frequency movements in stock prices: a state space decomposition (2000) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:tpr:restat:v:84:y:2002:i:4:p:649-667
Ordering information: This journal article can be ordered from
https://mitpressjour ... rnal/?issn=0034-6535
Access Statistics for this article
The Review of Economics and Statistics is currently edited by Pierre Azoulay, Olivier Coibion, Will Dobbie, Raymond Fisman, Benjamin R. Handel, Brian A. Jacob, Kareen Rozen, Xiaoxia Shi, Tavneet Suri and Yi Xu
More articles in The Review of Economics and Statistics from MIT Press
Bibliographic data for series maintained by The MIT Press ().