Journal Of The Econometric Society

An International Society for the Advancement of Economic
Theory in its Relation to Statistics and Mathematics

Edited by: Guido W. Imbens • Print ISSN: 0012-9682 • Online ISSN: 1468-0262

Econometrica: Jan, 1988, Volume 56, Issue 1

Dividend Innovations and Stock Price Volatility<37:DIASPV>2.0.CO;2-M
p. 37-61

Kenneth D. West

A standard efficient markets model states that a stock price equals the expected present discounted value of its dividends, with a constant discount rate. This is shown to imply that the variance of the innovation in the stock price is smaller than that of a stock price forecast made from a subset of the market's information set. The implication follows even if prices and dividends require differencing to induce stationarity. The relation between the variances appears not to hold for some annual U.S. stock market data. The rejection of the model is both quantitatively and statistically significant.

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