Asset price dynamics and Taylor rule fundamentals

Abstract

The purpose of this paper is to develop a forecasting equation from the dividend discount model. Our reduced form asset pricing equation features lagged dividend per share, term spread, short-term interest rates, infl ation rates, the output gap and real exective exchange rates. The results indicate that our forecasting model has significant and powerful relationships and outperforms the other models which are compared against it. We conclude that the reduced form forecasting model has merit and can influence the portfolio decisions of profit-seeking investor.