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Intrinsic bubbles: the case of stock prices: a comment

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Author Info
Lucy F. Ackert
William C. Hunter

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Abstract

Some recent empirical evidence suggests that stock prices are not properly modelled as the present discounted value of expected dividends and that empirical models incorporating nonlinear bubble components better fit the data. In this paper we show that the nonlinearity in the relationship between prices and dividends may arise from how managers choose dividend payout. In particular, we propose a model of managed dividends which can explain observed long-term trends in stock prices. This model of managed dividends is shown to be observationally equivalent to the popular intrinsic bubbles model.

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Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-99-26.

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Date of creation: 1999
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Publication status: Published in American Economic Review, December 1999, v. 89 no. 5, pp. 1372-1376
Handle: RePEc:fip:fedhwp:wp-99-26

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Keywords: Stock - Prices;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Krugman, Paul R, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 669-82, August. [Downloadable!] (restricted)
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  2. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Blackwell Publishing, vol. 57(3), pages 381-402, July. [Downloadable!] (restricted)
  3. Lee, Bong-Soo, 1996. "Time-Series Implications of Aggregate Dividend Behavior," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 9(2), pages 589-618. [Downloadable!] (restricted)
  4. Marsh, Terry A. & Merton, Robert C., 1984. "Dividend variability and variance bounds tests for the rationality of stock market prices," Working papers 1584-84., Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
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  5. Pettit, R Richardson, 1972. "Dividend Announcements, Security Performance, and Capital Market Efficiency," Journal of Finance, American Finance Association, vol. 27(5), pages 993-1007, December. [Downloadable!] (restricted)
  6. Maurice Obstfeld & Alan C. Stockman, 1985. "Exchange-Rate Dynamics," NBER Working Papers 1230, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Marsh, Terry A & Merton, Robert C, 1987. "Dividend Behavior for the Aggregate Stock Market," Journal of Business, University of Chicago Press, vol. 60(1), pages 1-40, January. [Downloadable!] (restricted)
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  8. Watts, Ross, 1973. "The Information Content of Dividends," Journal of Business, University of Chicago Press, vol. 46(2), pages 191-211, April. [Downloadable!] (restricted)
  9. Bagwell, Laurie Simon & Shoven, John B, 1989. "Cash Distributions to Shareholders," Journal of Economic Perspectives, American Economic Association, vol. 3(3), pages 129-40, Summer. [Downloadable!] (restricted)
  10. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," Journal of Business, University of Chicago Press, vol. 34, pages 411. [Downloadable!]
  11. Fudenberg, Drew & Tirole, Jean, 1995. "A Theory of Income and Dividend Smoothing Based on Incumbency Rents," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 75-93, February. [Downloadable!] (restricted)
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  12. Froot, Kenneth A & Obstfeld, Maurice, 1991. "Intrinsic Bubbles: The Case of Stock Prices," American Economic Review, American Economic Association, vol. 81(5), pages 1189-214, December. [Downloadable!] (restricted)
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  13. Ackert, Lucy F & Smith, Brian F, 1993. " Stock Price Volatility, Ordinary Dividends, and Other Cash Flows to Shareholders," Journal of Finance, American Finance Association, vol. 48(4), pages 1147-60, September. [Downloadable!] (restricted)
  14. Svensson, Lars E O, 1992. "An Interpretation of Recent Research on Exchange Rate Target Zones," Journal of Economic Perspectives, American Economic Association, vol. 6(4), pages 119-44, Fall. [Downloadable!] (restricted)
  15. Driffill, John & Sola, Martin, 1998. "Intrinsic bubbles and regime-switching," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 357-373, July. [Downloadable!] (restricted)
  16. Robert J. Shiller, 1984. "Stock Prices and Social Dynamics," Cowles Foundation Discussion Papers 719R, Cowles Foundation, Yale University. [Downloadable!]
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  1. Jakob B Madsen & Costas Milas, 2005. "The price-dividend relationship in inflationary and deflationary regimes," Keele Economics Research Papers KERP 2005/09, Centre for Economic Research, Keele University. [Downloadable!]
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  2. GIOT, Pierre & PETITJEAN, Mikael, 2006. "The information content of the Bond-Equity Yield Ratio: better than a random walk?," CORE Discussion Papers 2006089, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
    Other versions:
  3. GIOT, Pierre & PETITJEAN, Mikael, 2006. "Short-term market timing using the Bond-Equity Yield Ratio," CORE Discussion Papers 2006090, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
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  4. Mª Jose Gutierrez & Jesús Vazquez, 2003. "Switching equilibria. The Present Value Model for Stock Prices Revisited," DFAEII Working Papers 200226, University of the Basque Country - Department of Foundations of Economic Analysis II. [Downloadable!]
    Other versions:
  5. Lucy F. Ackert & William C. Hunter, 2000. "An empirical examination of the price-dividend relation with dividend management," Working Paper Series WP-00-22, Federal Reserve Bank of Chicago. [Downloadable!]
    Other versions:
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