02235cam a22002537 4500001000700000003000500007005001700012008004100029100002000070245008700090260006600177490004200243500001900285520107500304530006101379538007201440538003601512690011201548690012701660710004201787830007701829856003801906856003701944w10981NBER20171017164425.0171017s2004 mau||||fs|||| 000 0 eng d1 aEngel, Charles.10aSome New Variance Bounds for Asset Pricesh[electronic resource] /cCharles Engel. aCambridge, Mass.bNational Bureau of Economic Researchc2004.1 aNBER working paper seriesvno. w10981 aDecember 2004.3 aWhen equity prices are determined as the discounted sum of current and expected future dividends, Shiller (1981) and LeRoy and Porter (1981) derived a relationship between the variance of the price of equities, p(t), and the variance of the ex post realized discounted sum of current and future dividends: p*(t): Var(p*(t))>= Var(p(t)). The literature has long since recognized that this variance bound is valid only when dividends follow a stationary process. Others, notably West (1988), derive variance bounds that apply when dividends are nonstationary. West shows that the variance in innovations in p(t) must be less than the variance of innovations in a forecast of the discounted sum of current and future dividends constructed by the econometrician, p^(t). Here we derive a new variance bound when dividends are stationary or have a unit root, that sheds light on the discussion in the 1980s of the Shiller variance bound: Var(p(t)-p(t-1)) >= Var(p*(t)-p*(t-1))! We also derive a variance bound related to the West bound: Var(p^(t)-p^(t-1)) >= Var(p(t)-p(t-1)). aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aG12 - Asset Pricing • Trading Volume • Bond Interest Rates2Journal of Economic Literature class. 7aG14 - Information and Market Efficiency • Event Studies • Insider Trading2Journal of Economic Literature class.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w10981.4 uhttp://www.nber.org/papers/w1098141uhttp://dx.doi.org/10.3386/w10981