An alternative view of the US price–dividend ratio dynamics
Juan M. Londono (),
Marta Regúlez and
International Review of Economics & Finance, 2015, vol. 38, issue C, 291-307
The price–dividend (PD) ratio must be stationary for the present value model to be valid. However, several market episodes show stock prices drifting apart from dividends. This paper investigates PD ratio stationarity by considering a Markov-switching model featuring an asymmetric adjustment speed toward a unique attractor. A three-regime model displays the best regime identification. Within this specification, the post-war period is mainly characterized by a stationary state featuring slow reversion to a high attractor, the growing PD ratio period of 1996–2000 features a high-reversion stationary regime, and the subprime crisis episode is classified into a temporary nonstationary regime.
Keywords: Markov regime switching; Price–dividend ratio; Stationarity (search for similar items in EconPapers)
JEL-codes: C32 G12 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:38:y:2015:i:c:p:291-307
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