Fractional Integration of the Price-Dividend Ratio in a Present-Value Model
Adam Golinski (),
Joao Madeira () and
Dooruj Rambaccussing ()
MPRA Paper from University Library of Munich, Germany
We re-examine the dynamics of returns and dividend growth within the present-value framework of stock prices. We find that the finite sample order of integration of returns is approximately equal to the order of integration of the first-differenced price-dividend ratio. As such, the traditional return forecasting regressions based on the price-dividend ratio are invalid. Moreover, the nonstationary long memory behaviour of the price-dividend ratio induces antipersistence in returns. This suggests that expected returns should be modelled as an ARFIMA process and we show this improves the forecast ability of the present-value model in-sample and out-of-sample.
Keywords: price-dividend ratio; persistence; fractional integration; return predictability; present-value model. (search for similar items in EconPapers)
JEL-codes: C32 C58 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
https://mpra.ub.uni-muenchen.de/58554/1/MPRA_paper_58554.pdf original version (application/pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:58554
Access Statistics for this paper
More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().