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Shiller's proposition of Excessive Volatility ch1

R

Rajat gupta

Ton up Member
What do we mean by "systematic forecast errors" in Shiller'sproposition of Excessive Volatility?

Explanation by Sir John:-
Whilst a share price is theoretically the discounted value of all future dividends, we're not going to always get this right. However, Shiller's point was that whilst we might get it wrong (forecast error), we should not systematically get it wrong in the same way. This suggests we are systematicallyover-estimating or under-estimating the price.
 
What does 'systematically get it wrong in the same way' mean -that Shiller's discounted dividend model always overestimated the price of each equity at each month over the 100 years?
 
And please explain these criticisms of Shiller's methodology (page 12 of notes):

"1) the choice of terminal value for the stock price
2) the use of a constant discount rate
3) bias in estimates of the variances due to autocorrelation
4) possible non-stationarity of the series, ie the series may have stochastic trends which invalidate the measurements obtained for the variance of the stock price."

Wouldn't the terminal value be the observed share price at end of 100 years? And what is meant by 3) and 4)?
 
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