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Explaining the Variance of Price Dividend Ratios

John Cochrane

No 3157, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper presents a bound on the variance of the price-dividend ratio and a decomposition of the variance of the price-dividend ratio into components that reflect variation in expected future discount rates and variation in expected future dividend growth. Unobserved discount rates needed to make the variance bound and variance decomposition hold are characterized, and the variance bound and variance decomposition are tested for several discount rate models, including the consumption based model, and models based on interest rates plus a constant risk premium.

Date: 1989-11
Note: EFG
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Citations: View citations in EconPapers (38)

Published as The Review of Financial Studies, Vol. 5, No. 2, pp. 243-280, (1992).

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