The dividend-price ratio and expectations of future dividends and discount factors

A dividend-ratio model is introduced here that makes the logof the dividend-price ratio on a stock linear in optimally forecastfuture one-period real discount rates and future one-periodgrowth rates of real dividends. If ex post discount rates areobservable, this model can be tested by using vector autoregressivemethods. Four versions of the linearized model, differing inthe measure of discount rates, are tested for U.S. time series1871-1986 and 1926-1986: a version that imposes constant realdiscount rates, and versions that measure discount rates fromreal interest rate data, aggregate real consumption data, andreturn variance data. The results yield a metric to judge therelative importance of real dividend growth, measured real discountrates, and unexplained factors in determining the dividend-priceratio.