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The present value model of U.S. stock prices revisited: long-run evidence with structural breaks, 1871-2010

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  • Vicente Esteve

    (Universidad de Valencia and Universidad de La Laguna, Spain)

  • Manuel Navarro-Ibáñez

    (Universidad de La Laguna, Spain)

  • María A. Prats

    (Universidad de Murcia)

Abstract

According to several empirical studies, the Present Value model fails to explain the behaviour of stock prices in the long-run. In this paper we consider the possibility that a linear cointegrated regression model with multiple structural changes would provide a better empirical description of the Present Value model of U.S. stock prices. Our methodology is based on instability tests recently proposed in Kejriwal and Perron (2008, 2010) as well as the cointegration tests developed in Arai and Kurozumi (2007) and Kejriwal (2008). The results obtained are consistent with the existence of linear cointegration between the log stock prices and the log dividends. However, our empirical results also show that the cointegrat- ing relationship has changed over time. In particular, the Kejriwal-Perron tests for testing multiple structural breaks in cointegrated regression mod- els suggest a model of three or two regimes.

Suggested Citation

  • Vicente Esteve & Manuel Navarro-Ibáñez & María A. Prats, 2013. "The present value model of U.S. stock prices revisited: long-run evidence with structural breaks, 1871-2010," Working Papers 1305, Department of Applied Economics II, Universidad de Valencia.
    • Handle: RePEc:eec:wpaper:1305
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    More about this item

    Keywords

    Present value model; Stock prices; Dividends; Cointegration; Multiple Structural Breaks;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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