A note on the Gordon growth model with nonstationary dividend growth

Henri Pagès ()

No 75, BIS Working Papers from Bank for International Settlements

Abstract: Researchers have sometimes argued that the recent ascent in stock prices could be explained in some measure by changes in expectations about long-run future dividend growth. For example, Barsky and De Long (1993) argue that a small random walk component in the growth rate of dividends, when extrapolated into the future, is capable of reproducing the large swings in US stock prices over the period 1880-1990. I show that the hypothesis of a nonstationary permanent growth rate of dividends is inconsistent with the Gordon growth model.

Pages: 15 pages
Date: 1999-08
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