Researchers have sometimes argued that the recent ascent in stock prices could
be explained in some measure by changes in expectations about long-run future
dividend growth. For example, Barsky and De Long (1993) argue that a small
random walk component in the growth rate of dividends, when extrapolated into
the future, is capable of reproducing the large swings in US stock prices over
the period 1880-1990. I show that the hypothesis of a nonstationary permanent
growth rate of dividends is inconsistent with the Gordon growth model.
The views expressed in this publication are those of the authors and do not necessarily reflect the views of the BIS or its member central banks.