Switching Equilibria: The Present Value Model for Stock Prices Revisited

María José Gutiérrez Huerta and Jesús Vázquez Pérez

No 1134-8984, DFAEII Working Papers from University of the Basque Country - Department of Foundations of Economic Analysis II

Abstract: This paper analyzes the different dynamic features displayed by alternative RE equilibria and how these features change for small perturbations of the dividend process parameters. Using historical US data and structural estimation we test for the presence of feedback from stock prices to dividends. In addition, we empirically study whether the excess of volatility in stock prices is due to (i) regime-switching in the dividend process studied by Driffill and Sola (1998), (ii) switching equilibria suggested by Timmermann (1994) or (iii) a combination of these two possibilities. The empirical results provide evidence of a small but very significant presence of feedback from stock prices to dividends. Moreover, when analyzing different subsamples we find evidence of both regime-switching in the dividend process and switching equilibria.

Keywords: multiple RE equilibria; feedback and stock price volatility (search for similar items in EconPapers)
Date: 2002-07
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Dpto. de Fundamentos del Análisis Económico II, = Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain

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