Periodically Collapsing Bubbles in Stock Prices Cointegrated with Broad Dividends and Macroeconomic Factors
Man Fu () and
Prasad V. Bidarkota ()
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Man Fu: Florida International University, USA
Prasad V. Bidarkota: Department of Economics, University Park DM 320A, Florida International University, Miami, FL 33199, USA
Journal of Risk and Financial Management, 2011, vol. 4, issue 1, 1-36
We study fluctuations in stock prices using a framework derived from the present value model augmented with a macroeconomic factor. The fundamental value is derived as the expected present discounted value of broad dividends that include, in addition to traditional cash dividends, other payouts to shareholders. A stochastic discount factor motivated by the consumption-based asset pricing model is utilized. A single macroeconomic factor, namely the output gap determines the non-fundamental component of stock prices. A resulting trivariate Vector Autoregression (TVAR) model of stock prices, broad dividends, and the output gap shows evidence of cointegration in the DJIA and S&P 500 index data. Nonetheless, a sup augmented Dickey-Fuller test reveals existence of periodically collapsing bubbles in S&P 500 data during the late 1990s.
Keywords: stock prices; broad dividends; macro factors; cointegration; periodically collapsing bubbles (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:gam:jjrfmx:v:4:y:2011:i:1:p:97-132:d:28375
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