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Analytical cyclical price–dividend ratios

Author

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  • Mignanego, Fausto
  • Sbuelz, Alessandro

Abstract

How non-linear are exact log price–dividend ratios in the fundamental state variables? We work out in continuous time a novel exact formula for the log price–dividend ratio to study how much non-linearity is generated by the persistence of an exogenous mean-reverting and homoskedastic state variable. Our pricing formula highlights that persistence fosters endogenous conditional heteroskedasticity of the stock returns by fueling the non-linearity of the log price–dividend ratio.

Suggested Citation

  • Mignanego, Fausto & Sbuelz, Alessandro, 2022. "Analytical cyclical price–dividend ratios," Economics Letters, Elsevier, vol. 215(C).
    • Handle: RePEc:eee:ecolet:v:215:y:2022:i:c:s016517652200132x
    DOI: 10.1016/j.econlet.2022.110510
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    References listed on IDEAS

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    More about this item

    Keywords

    Price–dividend ratio; Long-run risk; Non-linearity; Endogenous heteroskedasticity; Log-linear approximation;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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