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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

Abstract: 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)
Date: 2011
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