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

Davide Delle Monache, Fabrizio Venditti and Ivan Petrella

No 2369, Working Paper Series from European Central Bank

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 parameters. 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. JEL Classification: C22, C32, C51, C53, E31

Keywords: equity premium; present-value models.; score-driven models; state space models; time-varying parameters (search for similar items in EconPapers)
Date: 2020-02
New Economics Papers: this item is included in nep-ets
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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:ecb:ecbwps:20202369

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