Changes in expected excess returns are responsible for most of the large high-frequency swings in the price-dividend ratio
An analogous coefficient for the market price-dividend ratio
The simulations also show that the value premium across price-dividend ratio
sorted portfolios is driven by a spread in the slow mean-reverting risk exposure.
They employed a log-linear approximation of stock returns and derived a linear relationship between the log price-dividend ratio
and expectations of future dividends and stock returns.
If price-dividend ratios
vary at all, then, then either (1) price-dividend ratios
forecast dividend growth (2) price-dividend ratios
forecast returns or (3) prices must follow a "bubble" in which the price-dividend ratio
is expected to rise without bound.
Table 4 also shows the price-dividend ratio
for each state, which we have divided by 2 to make it comparable with the more familiar PE ratio, commonly used for evaluating the level of prices on the stock market.
In this case changes in log dividends are stationary, so from (10) the log price-dividend ratio
is stationary provided that the expected stock return is stationary.
If we impose a unit slope coefficient and test the stationarity of the log price-dividend ratio
, the ADF test statistic is -3.
In their study, Campbell and Shiller also investigate the relation between the price-dividend ratio
and stock price growth, which exhibits similar patterns.
Here, Ps, is the log price-dividend ratio
for country s, G[sub st] is defined as [delta (difference)
The price-dividend ratio
has about doubled in the postwar era, and this increase could well be a surprise.
Alternatively, investors might use past levels of the price-dividend ratio
to forecast future dividend growth because this ratio has been found to successfully predict stock prices in the empirical literature.