Abstract
How non-linear are exact log price–dividend ratios in the fundamental state variables? We work out in continuous time a novel exact formula for the log price–dividend ratio to study how much non-linearity is generated by the persistence of an exogenous mean-reverting and homoskedastic state variable. Our pricing formula highlights that persistence fosters endogenous conditional heteroskedasticity of the stock returns by fueling the non-linearity of the log price–dividend ratio.
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