Dividend Innovations and Stock Price Volatility
Kenneth West ()
No 1833, NBER Working Papers from National Bureau of Economic Research, Inc
Abstract:
This paper establishes an inequality that may be used to test the null hypothesis that a stock price equals the expected present discounted value of its dividend stream, with a constant discount rate. The inequality states that if this hypothesis is true, the variance of the innovation in the stock price is bounded above by a certain function of the variance in the innovation in the dividend. The bound is valid even if prices and dividends are nonstationary.The inequality is used to test the null hypothesis, for some long term annual U.S. stock price data. The null is decisively rejected, with the stock price innovation variance exceeding its theoretical upper bound by a factor of as much as twenty. The rejection is highly significant statistically. Regression diagnostics and some informal analysis suggest that the results are more consistent with there being speculative bubbles in the U.S. stock market than with a failure of the rational expectations or constant discount rate hypothesis.
Date: 1986-02
Note: EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (78)
Published as "Dividend Innovations and Stock Price Volatility." Econometrica, Vol. 56, No. 1, pp. 37-61, (January 1988).
Downloads: (external link)
http://www.nber.org/papers/w1833.pdf (application/pdf)
Related works:
Journal Article: Dividend Innovations and Stock Price Volatility (1988) 
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:nbr:nberwo:1833
Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w1833
Access Statistics for this paper
More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().