The present value model of U.S. stock prices revisited: long-run evidence with structural breaks, 1871-2010

Vicente Esteve (), Manuel Navarro-Ibáñez () and Maria Prats
Additional contact information
Vicente Esteve: Universidad de Valencia and Universidad de La Laguna, Spain

No 1305, Working Papers from Department of Applied Economics II, Universidad de Valencia

Abstract: According to several empirical studies, the Present Value model fails to explain the behaviour of stock prices in the long-run. In this paper we consider the possibility that a linear cointegrated regression model with multiple structural changes would provide a better empirical description of the Present Value model of U.S. stock prices. Our methodology is based on instability tests recently proposed in Kejriwal and Perron (2008, 2010) as well as the cointegration tests developed in Arai and Kurozumi (2007) and Kejriwal (2008). The results obtained are consistent with the existence of linear cointegration between the log stock prices and the log dividends. However, our empirical results also show that the cointegrat- ing relationship has changed over time. In particular, the Kejriwal-Perron tests for testing multiple structural breaks in cointegrated regression mod- els suggest a model of three or two regimes.

Keywords: Present value model; Stock prices; Dividends; Cointegration; Multiple Structural Breaks (search for similar items in EconPapers)
JEL-codes: C22 G12 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2013-01
New Economics Papers: this item is included in nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://repecsrv.uv.es/paper/RePEc/pdf/eec_1305.pdf First version, 2013 (application/pdf)

Related works:
Working Paper: The present value model of U.S. stock prices revisited: long-run evidence with structural breaks, 1871-2010 (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eec:wpaper:1305

Access Statistics for this paper

More papers in Working Papers from Department of Applied Economics II, Universidad de Valencia Contact information at EDIRC.
Bibliographic data for series maintained by Vicente Esteve ().