The Quarterly Journal of Economics · 1993 · 413 citations · 0 references
BusinessEconomicsFinanceFinancial EconomicsForecastingTime Series AnalysisAsset Return ModelingInvestmentLong-term ForecastingStock ModelingTime Series ForecastingDividend ProcessesGrowth RatesMoving Average ModelsMoving Average ProcessesStochastic Process Analysis
Major long-run swings in the U. S. stock market over the past century are broadly consistent with a model driven by changes in current and expected future dividends in which investors must estimate the time-varying long-run dividend growth rate. Such an estimated long-run growth rate resembles a long distributed lag on past dividend growth, and is highly correlated with the level of dividends. Prices therefore respond more than proportionately to long-run movements in dividends. The time-varying component of dividend growth need not be detectable in the dividend data for it to have large effects on stock prices.