40 Pages Posted: 7 Jul 2004
Date Written: December 1986
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.
Suggested Citation: Suggested Citation
Campbell, John Y. and Shiller, Robert J., The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors (December 1986). NBER Working Paper No. w2100. Available at SSRN: https://ssrn.com/abstract=227386
By Eugene Fama