Cointegration Tests of Present Value Models with a Time-Varying Discount Factor

Allan Timmermann

Journal of Applied Econometrics, 1995, vol. 10, issue 1, 17-31

Abstract: The paper analyses the impact of persistence and volatility in the discount rate in present-value models on conintegration tests in levels and in logarithms. In simulations we find that the probability of not rejecting the null of no cointegration depends on the persistence of the discount rate process and can be very high when the expected returns process is highly persistent. In contrast, the cointegration tests are very robust with respect to the level of volatility in the discount rate. We discuss the relevance of our findings for the U.S. stock market where standard ADF tests do not reject the null of no cointegration between stock prices and dividends. Based on estimates of persistence in four asset pricing models, we find that a model which links expected returns to the dividend yield is sufficiently persistent to explain the failure of rejecting the null that stock prices and dividends are not cointegrated. Copyright 1995 by John Wiley & Sons, Ltd.

Date: 1995
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (34)

Downloads: (external link)
http://links.jstor.org/sici?sici=0883-7252%2819950 ... 0.CO%3B2-H&origin=bc full text (application/pdf)
http://qed.econ.queensu.ca:80/jae/1995-v10.1/ Supporting data files and programs (text/html)
Access to full text is restricted to JSTOR subscribers. See http://www.jstor.org for details.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:jae:japmet:v:10:y:1995:i:1:p:17-31

Ordering information: This journal article can be ordered from
http://www3.intersci ... e.jsp?issn=0883-7252

Access Statistics for this article

Journal of Applied Econometrics is currently edited by M. Hashem Pesaran

More articles in Journal of Applied Econometrics from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley-Blackwell Digital Licensing () and Christopher F. Baum ().