Econ 1030 (2015): Problem Set 9

Due Apr 24

Answers will be posted on Monday night (April 20).

Question 1: Part I

Lets assume that dividends are a random walk and solve for the asset price of a stock with

dividends . A random walk implies that

                                    1    1

where 1 is noise that has zero mean and is unpredictable with any information available

at date (or earlier).

(a) Using repeated substitution, show that

                                                   X

                                                    1

(b) Explain why ...