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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 ()

EMF Research Papers from Economic Modelling and Forecasting Group

Abstract: In this paper we develop a general framework to analyze state space models with timevarying 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 timevarying 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 longrun 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: state space models; time-varying parameters; score-driven models; equity premium; present-value models (search for similar items in EconPapers)
JEL-codes: C32 C51 E44 G12 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-cfn, nep-mac and nep-ore
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https://warwick.ac.uk/fac/soc/wbs/subjects/finance ... papers/emf_wp_29.pdf

Related works:
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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