MODELING THE DIVIDEND-PRICE RATIO: THE ROLE OF FUNDAMENTALS USING A REGIME-SWITCHING APPROACH

Steen Nielsen and Jan Overgaard Olesen
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Steen Nielsen: Department of Economics, Copenhagen Business School, Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark
Jan Overgaard Olesen: Department of Economics, Copenhagen Business School, Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark

No 12-2000, Working Papers from Copenhagen Business School, Department of Economics

Abstract: Using annual data over the post-World War I-period, we estimate a fundamentals-based

empirical model for the dividend-price ratio of Danish stocks. The key fundamentals-variable

is a time-varying discount rate, decomposed into time-varying measures for the growth-adjusted

real interest rate and the risk premium on stocks. In addition, the model includes

real dividends and the lagged dividend-price ratio as explanatory variables. Results show

that the model suffers from structural breaks over the sample. Using a two-state regime-switching

approach to capture non-modeled shifts in the economic environment, we find that

all fundamentals are highly significant in at least one regime and, moreover, obtain a good

fit. The model identifies two very persistent regimes characterized by a ‘low’, respectively,

‘high’ dividend-price ratio.

Keywords: Dividend-price ration; Stocks; Denmark (search for similar items in EconPapers)
JEL-codes: G19 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2001-07-12
New Economics Papers: this item is included in nep-fmk
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