Some new variance bounds for asset prices
By: Charles Engel.
Contributors: National Bureau of Economic Research.
Series: NBER working paper series ;; working paper 10981; Working paper series (National Bureau of Economic Research : Online) ;; working paper no. 10981.
Publisher: National Bureau of Economic Research
Published: 2004
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "When equity prices are determined as the discounted sum of current and expected future dividends, Shiller (1981) and LeRoy and Porter (1981) derived a relationship between the variance of the price of equities, p(t), and the variance of the ex post realized discounted sum of current and future dividends: p*(t): Var(p*(t))>= Var(p(t)).  The literature has long since recognized that this variance bound is valid only when dividends follow a stationary process.  Others, notably West (1988), derive variance bounds that apply when dividends are nonstationary.  West shows that the variance in innovations in p(t) must be less than the variance of innovations in a forecast of the discounted sum of current and future dividends constructed by the econometrician, p^(t).  Here we derive a new variance bound when dividends are stationary or have a unit root, that sheds light on the discussion in the 1980s of the Shiller variance bound: Var(p(t)-p(t-1)) >= Var(p*(t)-p*(t-1))! We also derive a variance bound related to the West bound: Var(p^(t)-p^(t-1)) >= Var(p(t)-p(t-1))"--National Bureau of Economic Research web site.
Notes: Also available in print.
Includes bibliographical references.
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