Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends? / Robert J. Shiller.

By:

Shiller, Robert J

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w0456.Publication details: Cambridge, Mass. National Bureau of Economic Research 1980.Description: 1 online resource: illustrations (black and white)Subject(s):

E - Macroeconomics and Monetary Economics

Online resources:

Available additional physical forms:

Hardcopy version available to institutional subscribers

Abstract: This paper will develop the efficient markets model in Section I to clarify some theoretical questions that may arise in connection with the inequality (1) and some similar inequalities will be derived that put limits on the standard deviation of the innovation in price and the standard deviation of the change in price. The model is restated in innovation form which allows better understanding of the limits on stock price volatility imposed by the model. In particular, this will enable us to see (Section II) that the standard deviation of p is highest when information about dividends is revealed smoothly and that if information is revealed in big lumps occasionally the price series may have higher kurtosis (fatter tails) but will have lower variance. The notion expressed by some that earnings rather than dividend data should be used is discussed in Section III, and a way of assessing the importance of time variation in real discount rates is shown in Section IV. The inequalities are compared with the data in Section V.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
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Previous	nber w0453 Disequilibrium Dynamics with Inventories and Anticipatory Price-Setting: Some Impirical Results /	nber w0454 An Exploration of the Dynamic Relationship between Health and Cognitive Development in Adolescence /	nber w0455 A Consistent Characterization of a Near-Century of Price Behavior /	nber w0456 Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends? /	nber w0457 Tax Neutrality and the Social Discount Rate: A Suggested Framework /	nber w0458 Postwar Changes in the American Financial Markets /	nber w0459 Postwar Macroeconomics: The Evolution of Events and Ideas /	Next

February 1980.

This paper will develop the efficient markets model in Section I to clarify some theoretical questions that may arise in connection with the inequality (1) and some similar inequalities will be derived that put limits on the standard deviation of the innovation in price and the standard deviation of the change in price. The model is restated in innovation form which allows better understanding of the limits on stock price volatility imposed by the model. In particular, this will enable us to see (Section II) that the standard deviation of p is highest when information about dividends is revealed smoothly and that if information is revealed in big lumps occasionally the price series may have higher kurtosis (fatter tails) but will have lower variance. The notion expressed by some that earnings rather than dividend data should be used is discussed in Section III, and a way of assessing the importance of time variation in real discount rates is shown in Section IV. The inequalities are compared with the data in Section V.