Abstract

http://ssrn.com/abstract=1439849
 
 

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Likelihood-Based Estimation of Exactly-Solved Present-Value Models


Jules H. Van Binsbergen


University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Ralph S. J. Koijen


London Business School - Department of Finance; National Bureau of Economic Research (NBER)

March 15, 2011


Abstract:     
We develop a tractable exactly solved present-value model to study the dynamics of stock returns, dividend growth rates, and the price-dividend ratio. We show that standard predictive regressions of returns and dividend growth rates on the lagged price-dividend ratio suffer from a problem that is akin to an errors-in-variables problem. By using non-linear filtering techniques to estimate the structural parameters of our present-value model, we can mitigate this errors-in-variables problem. We then use this framework to decompose the price-dividend ratio and excess stock returns, and study the influence of approximation errors that would arise if we were to log-linearize the model. Our model induces heteroscedasticity in returns, even though the latent processes for expected returns and expected dividend growth rates are homoscedastic.

Number of Pages in PDF File: 49

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Date posted: July 28, 2009 ; Last revised: September 15, 2013

Suggested Citation

van Binsbergen, Jules H. and Koijen, Ralph S. J., Likelihood-Based Estimation of Exactly-Solved Present-Value Models (March 15, 2011). Available at SSRN: http://ssrn.com/abstract=1439849 or http://dx.doi.org/10.2139/ssrn.1439849

Contact Information

Jules H. Van Binsbergen
University of Pennsylvania - The Wharton School ( email )
3641 Locust Walk
Philadelphia, PA 19104-6365
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
HOME PAGE: http://www.nber.org/people/jules_vanbinsbergen
Ralph S. J. Koijen (Contact Author)
London Business School - Department of Finance ( email )
Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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