T-bill rates and CPI inflation rates from Ibbotson Ass. Need to check for unit roots.
Standard errors are no good if non-stationary regressors.
This turns out to be better than transforming the variables by removing a deterministic linear trend, because it induces biases. I m about to discuss are based on the 1987 paper. They use a VAR to estimate the expected future discount rates and expected future dividend growth. Campbell and Shiller assume market observes , a vector of state variables and follows a linear stochastic process. They also assume can be written as a VAR with p lags.