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

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  • Vicente Esteve
  • Manuel Navarro-Ibáñez
  • María A. Prats

Abstract

According to several empirical studies, the Present Value model fails to explain the behavior 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). Thwe 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 cointegrating relationship has changed over time. In particular, the Kejriwal-Perron tests for testing multiple structural breaks in cointegrated regression models suggest a model of three or two regimes.

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  • Vicente Esteve & Manuel Navarro-Ibáñez & María A. Prats, 2013. "The present value model of US stock prices revisited: long-run evidence with structural breaks, 1871-2010," Working Papers 04/13, Instituto Universitario de Análisis Económico y Social.
    • Handle: RePEc:uae:wpaper:0413
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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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