Stock price volatility and equity premium

A dynamic general equilibrium model of stock prices is developed which yiel ds a stock price volatility and equity premium that are close to the histor ical values. Non-observability of the expected dividend growth rate introdu ces an element of learning which increases the volatility of stock price. C alibration to the U.S. dividend and consumption processes yield interest ra te and stock price processes that conform closely to the styled facts for t he U.S, capital market. (C) 2001 Elsevier Science B.V. All rights reserved.