Working Paper: NBER ID: w2100
Authors: John Y. Campbell; Robert J. Shiller
Abstract: A linearization of a rational expectations present value model for corporate stock prices produces a simple relation between the log dividend-price ratio and mathematical expectations of future log real dividend changes and future real discount rates. This relation can be tested using vector autoregressive methods. Three versions of the linearized model, differing in the measure of discount rates, are tested for U. S. time series 1871-1986: versions using real interest rate data, aggregate real consumption data, and return variance data. The results yield a metric to judge the relative importance of real dividend growth, measured real discount rates and unexplained factors in determining the dividend-price ratio.
Keywords: dividend-price ratio; rational expectations; stock prices; discount rates; time series analysis
JEL Codes: E44; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| expectations of future log real dividend changes (G35) | log dividend-price ratio (G19) |
| future real discount rates (E43) | log dividend-price ratio (G19) |
| log dividend-price ratio (G19) | future dividends (G35) |
| when dividends are forecasted to decrease (G35) | log dividend-price ratio is expected to be high (G19) |
| when discount rates are high (E43) | log dividend-price ratio is expected to be high (G19) |
| dividend growth expectations (G35) | log dividend-price ratio (G19) |