Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/228983 
Year of Publication: 
2020
Series/Report no.: 
ECB Working Paper No. 2369
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
In this paper we develop a general framework to analyze state space models with timevarying system matrices where time variation is driven by the score of the conditional likelihood. We derive a new filter that allows for the simultaneous estimation of the state vector and of the time-varying parameters. We use this method to study the timevarying relationship between the price dividend ratio, expected stock returns and expected dividend growth in the US since 1880. We find a significant increase in the long-run equilibrium value of the price dividend ratio over time, associated with a fall in the longrun expected rate of return on stocks. The latter can be attributed mainly to a decrease in the natural rate of interest, as the long-run risk premium has only slightly fallen.
Subjects: 
State space models
time-varying parameters
score-driven models
equitypremium
present-value models
JEL: 
C22
C32
C51
C53
E31
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-4012-2
Document Type: 
Working Paper

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