The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors
A linearization of a rational expectations present value model for corporate stock prices produces a simple relation between the log dividend-price ratio and mathematical expectations of future log real dividend changes and future real discount rates. This relation can be tested using vector autoregressive methods. Three versions of the linearized model, diﬀering in the measure of discount rates, are tested for United States time series 1981-1986: versions using real interest rate data. The results yield a metric to judge the relative importance of real dividend growth, measured real discount rates and unexplained factors in determining the dividend-price ratio.
Campbell, John Y. and Shiller, Robert J., "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors" (1986). Cowles Foundation Discussion Papers. 1055.