NBER Working Paper #3157November 1989

EXPLAINING THE VARIANCE OF PRICE DIVIDEND RATIOS

ABSTRACI

This paper presents a bound on the variance of the price-dividend ratio

and a decomposition of the variance of the price-dividend ratio into

components that reflect variation in expected future discount rates and

variation in expected future dividend growth. Unobserved discount rates

needed to make the variance bound and variance decomposition hold are

characterized, and the variance bound and variance decomposition are tested

for several discount rate models, including the consumption based model, and

models based on interest rates plus a constant risk premium.

John H. CochraneDepartment of EconomicsUniversity of Chicago1126 E. 59th StreetChicago, Illinois 60637(312)702-3059