Price dividend ratio and long-run stock returns: a score driven state space model

Davide Delle Monache, Ivan Petrella and Fabrizio Venditti

No 1296, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: In this paper we develop a general framework to analyse 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 US 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.

Keywords: state space models; time-varying parameters; score-driven models; equity premium; present-value models (search for similar items in EconPapers)
JEL-codes: C32 C51 C53 E44 G12 (search for similar items in EconPapers)
Date: 2020-09
New Economics Papers: this item is included in nep-cfn, nep-mac and nep-ore
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Related works:
Journal Article: Price Dividend Ratio and Long-Run Stock Returns: A Score-Driven State Space Model (2021)
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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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1296_20

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