This paper employs the state-space model to reexamine the fundamental issue in finance of whether it is the expected returns or the expected dividends growth that is primarily responsible for stock price variations. We use Bayesian methods to show that there is a substantial uncertainty about the contributions of expected returns and expected dividends to fluctuations in the price–dividend ratio when the aggregate returns and dividends data are used. The substantial uncertainty of the contributions results from the model being weakly identified. Our finding challenges the notion long held in the existing literature that it is the expected returns that contribute most to price–dividend variations.
