THE PRESENT VALUE MODEL WITH STOCHASTIC DISCOUNT RATE AND AN ANN PROCESS FOR BROAD DIVIDENDS

Man Fu and Prasad V. Bidarkota ()
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Man Fu: Department of Economics, University Park DM 320A, Florida International University, Miami, FL 33199, USA
Prasad V. Bidarkota: Department of Economics, University Park DM 320A, Florida International University, Miami, FL 33199, USA

Annals of Financial Economics (AFE), 2011, vol. 06, issue 01, 1-20

Abstract: This paper uses an artificial neural network (ANN) model to forecast broad dividends, and computes fundamental stock prices with a stochastic discount factor (SDF). Broad dividends are used because they measure payouts to shareholders more accurately. Since nonlinearity is found in broad dividends, an ANN process is fit to these. Empirical results show that the consumption-based broad dividends model with ANN forecasting procedure predicts fundamental prices better, compared with models using linear dividends process, narrow dividends, or a constant discount factor. Nonetheless, actual stock prices remain largely detached from fundamental prices. Deviations between actual and fundamental prices, positive or negative, are found to coincide with business cycles, a result not consistent with alternative models considered in the paper.

Keywords: Stock prices; present value model; stochastic discount factor; broad dividends; artificial neural network (ANN); E44; E47; G12; G17 (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1142/S2010495211500011

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