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

Davide Delle Monache (), Ivan Petrella () and Fabrizio Venditti

No 14107, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In this paper 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 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: Equity premium; present-value models; score-driven models; State space models; time-varying parameters (search for similar items in EconPapers)
JEL-codes: C32 C51 C53 E44 G12 (search for similar items in EconPapers)
Date: 2019-11
New Economics Papers: this item is included in nep-mac
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Working Paper: Price dividend ratio and long-run stock returns: a score driven state space model (2020) Downloads
Working Paper: Price dividend ratio and long-run stock returns: a score driven state space model (2020) Downloads
Working Paper: Price Dividend Ratio and Long-Run Stock Returns: a Score Driven State Space Model (2019) Downloads
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