How non-linear are exact log price–dividend ratios in the fundamental state variables? We work out in continuous time a novel exact formula for the log price–dividend ratio to study how much non-linearity is generated by the persistence of an exogenous mean-reverting and homoskedastic state variable. Our pricing formula highlights that persistence fosters endogenous conditional heteroskedasticity of the stock returns by fueling the non-linearity of the log price–dividend ratio.
Mignanego, F., Sbuelz, A., Analytical cyclical price–dividend ratios, <<ECONOMICS LETTERS>>, 2022; 215 (C): 1-6. [doi:10.1016/j.econlet.2022.110510] [http://hdl.handle.net/10807/202773]
Analytical cyclical price–dividend ratios
Mignanego, Fausto;Sbuelz, Alessandro
2022
Abstract
How non-linear are exact log price–dividend ratios in the fundamental state variables? We work out in continuous time a novel exact formula for the log price–dividend ratio to study how much non-linearity is generated by the persistence of an exogenous mean-reverting and homoskedastic state variable. Our pricing formula highlights that persistence fosters endogenous conditional heteroskedasticity of the stock returns by fueling the non-linearity of the log price–dividend ratio.
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