Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?

• Published in: The American economic review 1981-06, Vol.71 (3), p.421-436
• Main Author: Shiller, Robert J.
• Format: Article
• Language: English
• Subjects: Changes; Common stock; Datasets; Discount rates; Dividends; Effects; Efficient markets; Expectations; Interest rates; Present value; Price indexes; Price volatility; Prices; Securities markets; Standard and Poors 500 Index; Standard deviation; Statistical variance; Stock market indices; Stock prices; Volatility
• ISSN: 0002-8282; 1944-7981

A simple model that is frequently used to interpret movements in corporate common stock price indices asserts that real stock prices equal the present value of rationally expected or optimally forecast future real dividends discounted by a constant real discount rate. This model is referred to as the ''efficient markets model''. It is often claimed in popular discussions that stock price indices seem too ''volatile.'' Indeed, measures of stock price volatility over the past century appear to be far too high to be attributed to new information about future real dividends if uncertainty about future dividends is measured by the sample standard deviations of real dividends from their long-run exponential growth path. One way of saving the general notion of efficient markets would be to attribute the movements in stock prices to changes in expected real interest rates. However, the movements in expected real interest rates that would justify the variability in stock prices are very large-much larger than the movements in nominal interest rates over the sample period.