Real dividend - stock market price causality nexus: an application of Markov switching model

Emmanuel Anoruo

Afro-Asian Journal of Finance and Accounting, 2014, vol. 4, issue 1, 63-74

Abstract: This paper examines the causal relationship between real dividends and stock market prices for the USA using the Markov-switching vector autoregressive model (MS-VAR). The results indicate that both real dividends and stock market prices have one order of integration and are not cointegrated. The results from the MS-VAR reveal that causality runs from real stock prices to real dividends but not vice versa. The finding that real dividends are not informational in predicating future movements in stock market prices is consistent with the 'dividend irrelevance theory' which posits that dividends do not have predictive power over future earnings.

Keywords: dividends; stock market prices; MS-VAR; regime switching; Markov switching model; vector autoregressive model; USA; United States; causality; future earnings. (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:ids:afasfa:v:4:y:2014:i:1:p:63-74

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