This paper presents a bound on the variance of the price-dividend ratio
and a decomposition of the variance of the price-dividend ratio into
components that reflect variation in expected future discount rates and
variation in expected future dividend growth. Unobserved discount rates
needed to make the variance bound and variance decomposition hold are
characterized, and the variance bound and variance decomposition are tested
for several discount rate models, including the consumption based model, and
models based on interest rates plus a constant risk premium.
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