Bubbles in the dividend-price ratio? Evidence from an asymmetric exponential smooth-transition model

David Gordon McMillan

    Research output: Contribution to journalArticlepeer-review

    34 Citations (Scopus)

    Abstract

    Recent stock price movements have led to a re-examination of the present value model. An increasing belief is that although dividends and prices are indeed cointegrated, they may exhibit non-linear dynamics in the process of reversion. This paper implements an empirical model designed to capture two possible explanations for such non-linearity, namely transaction costs and noise traders. Utilising data from a number of countries we show that the dynamics of the log dividend yield are, first, characterised by an inner random walk regime, where the benefits of engaging in trade do not outweigh the costs and so the process moves randomly. Second, a reverting outer regime where the dynamics of reversion differ between positive and negative deviations, such that price rises greater than the level supported by dividends exhibit a greater degree of persistence than price falls relative to dividends. (c) 2006 Elsevier B.V. All rights reserved.

    Original languageEnglish
    Pages (from-to)787-804
    Number of pages18
    JournalJournal of Banking & Finance
    Volume31
    Issue number3
    DOIs
    Publication statusPublished - Mar 2007

    Keywords

    • stock market dynamics
    • present value model
    • asymmetric-ESTR model
    • behavioural finance
    • REAL EXCHANGE-RATES
    • NONLINEAR MEAN-REVERSION
    • ERROR-CORRECTION MODELS
    • UNIT-ROOT TESTS
    • STOCK-PRICES
    • NUISANCE PARAMETER
    • NULL HYPOTHESIS
    • EQUITY PREMIUM
    • TIME-SERIES
    • COINTEGRATION

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