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Price dividend ratio and long-run stock returns : a score driven state space model

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Delle Monache, Davide, Venditti, Fabrizio and Petrella, Ivan (2021) Price dividend ratio and long-run stock returns : a score driven state space model. Journal of Business and Economic Statistics, 39 (4). pp. 1054-1065. doi:10.1080/07350015.2020.1763805

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Official URL: https://doi.org/10.1080/07350015.2020.1763805

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Abstract

In this article, we develop a general framework to analyze state space models with time-varying 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 time-varying relationship between the price dividend ratio, expected stock returns and expected dividend growth in the United States 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 long-run 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.

Item Type: Journal Article
Subjects: H Social Sciences > HA Statistics
H Social Sciences > HC Economic History and Conditions
H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Warwick Business School > Finance Group
Faculty of Social Sciences > Warwick Business School
Library of Congress Subject Headings (LCSH): State-space methods -- Econometric models, Time-series analysis -- Econometric models, Stock price forecasting -- Econometric models, Rate of return -- Forecasting -- Econometric models
Journal or Publication Title: Journal of Business and Economic Statistics
Publisher: Taylor & Francis Inc.
ISSN: 0735-0015
Official Date: 2021
Dates:
DateEvent
2021Published
2 June 2020Available
4 May 2020Accepted
Volume: 39
Number: 4
Page Range: pp. 1054-1065
DOI: 10.1080/07350015.2020.1763805
Status: Peer Reviewed
Publication Status: Published
Reuse Statement (publisher, data, author rights): This is an Accepted Manuscript of an article published by Taylor & Francis in Journal of Business and Economic Statistics on 02/06/2020, available online: http://www.tandfonline.com/10.1080/07350015.2020.1763805
Access rights to Published version: Restricted or Subscription Access
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