There is No Excess Volatility Puzzle

We present two valuation models that we use to account for the annual data on price per share and dividends per share for the CRSP Value-Weighted Index from 1929-2023. We show that it is a simple matter to account for these data based purely on a model of variation in the expected ratio of dividends per share to aggregate consumption over time under two conditions. First, investors must receive news shocks regarding the expected ratio of dividends per share to aggregate consumption in the long run. Second, the discount rate used to evaluate the impact of this news on the current price per share must be low. We argue that both of these conditions are likely satisfied in the data. Because our valuation model reproduces the data on price per share and dividends per share exactly over this long time period, it also reproduces realized values of returns, dividend growth, the dividend-price ratio, and all Campbell-Shiller-style regression results involving these variables. Thus, we conclude that the answer to Shiller (1981)'s question "Do stock prices move too much to be justified by subsequent movements in dividends?" is No