Fractional Integration of the Price-Dividend Ratio in a Present-Value Model of Stock Prices

Goliński, Adam; Madeira, Joao; Rambaccussing, Dooruj

doi:10.2139/ssrn.2495869

Cited by 3 publications

(3 citation statements)

References 90 publications

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“…This pattern is also apparent in other measures of asset prices relative to fundamentals (Cochrane, 2005, pp. 356–359; Goliński, Madeira, & Rambaccussing, 2015). 2…”

Section: Asset Prices and Business Cycle Dynamicsmentioning

confidence: 99%

Extrapolative expectations and macroeconomic dynamics: Evidence from an estimated DSGE model

Bask

Madeira

2020

Int. J Fin Econ

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We outline a dynamic stochastic general equilibrium (DSGE) model with extrapolative expectations in asset pricing and fit the model to 50 years of quarterly U.S. macroeconomic time series data with Bayesian techniques. We conclude that extrapolative expectations in asset pricing are statistically significant, quantitatively relevant and result in a substantial improvement in the model's fit to the data. In particular, extrapolative expectations in asset pricing lead to more pronounced hump‐shaped responses in the asset price and investment to shocks, and the model matches the degree of persistence observed in the asset price data significantly better than the alternative DSGE models considered here, which are the Smets and Wouters (2007; American Economic Review, 97, 586–606) model, including a variant of the model with pre‐determined investment expenditures, and the Gilchrist, Ortiz, and Zakrajsek (2009; Credit risk and the macroeconomy: Evidence from an estimated DSGE model. Mimeo) financial frictions model. Our findings are confirmed by numerous robustness exercises, including different prior assumptions, different sample periods and different time series variables, both excluding asset price data and the use of different asset price measures.

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“…This pattern is also apparent in other measures of asset prices relative to fundamentals (Cochrane, 2005, pp. 356–359; Goliński, Madeira, & Rambaccussing, 2015). 2…”

Section: Asset Prices and Business Cycle Dynamicsmentioning

confidence: 99%

Extrapolative expectations and macroeconomic dynamics: Evidence from an estimated DSGE model

Bask

Madeira

2020

Int. J Fin Econ

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“…However, g t and μ t can assume any functional form as long as it includes details about the information set involved. Two specifications that have been explored in this literature are the AR (p) and ARFIMA (p,d,q) as in Golinski, Madeira, and Rambaccussing (2018). Following Van Binsbergen and Koijen (2010), an AR (1) is assumed in the current analysis.…”

Section: The State Space Modelmentioning

confidence: 99%

Expected returns and expected dividend growth in Europe: Legal origin, institutional, and financial determinants

Rambaccussing

Power

2018

Int. J Fin Econ

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This paper uses a present value approach to show that price movements for equity indices in a sample of European stock markets can be traced to legal origin, institutional, and corporate financial factors. The present value literature states that stock indices move due to changes either in discount rates, dividend growth, or a combination of the two. Empirically, little is known about the mechanism through which legal, institutional, and corporate financial factors influence these variables, especially in a European context. The current paper attempts to plug this gap in the literature. Using the state space approach, we show that although expected returns are highly persistent, expected dividend growth tends to vary across the sample. Movements in markets are mainly due to changes in the discount rate. However, there appears to be a difference in the proportion of movements attributable to discount rate and dividend growth components. Stock markets in civil law countries tend to have a stronger link with the dividend growth variables as well as market size and activity measures. Expected dividend growth is also driven by profitability factors in both types of country. By contrast, there is no strong evidence of corporate indicators influencing expected returns.

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“…Closely linked to Binsbergen and Koijen (2010), Rytchkov (2012) finds that expected returns are time varying and can predict realized returns better than the price-dividend ratio. Golinski et al (2015) exploit the fact that the price-dividend ratio may be fractionally integrated to demonstrate that the conventional returns equation in prior investigations can be unbalanced 2 . They also document a marginal improvement in predictability after considering fractional integration in expected returns.…”

Section: Introductionmentioning

confidence: 99%

Fluctuations in the UK equity market: what drives stock returns?

Rambaccussing

Power

2017

The European Journal of Finance

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Present value parameters from a state-space model are estimated for the UK FT All-Share Index. The estimated parameters are used to construct a time series of expected future returns and expected future values of dividend growth, both of which are found to be time-varying with persistent components. Variations in the price-dividend ratio appear to be driven primarily by the variance in expected returns. A comparison with the findings from a present value-constrained vector autoregression (VAR) model indicates that the latter forecasts future realized returns and dividend growth better than the series constructed using a state-space approach. Furthermore, when the model is estimated for monthly and quarterly data, expected dividend growth is found to be more persistent.

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Fractional Integration of the Price-Dividend Ratio in a Present-Value Model of Stock Prices

Cited by 3 publications

References 90 publications

Extrapolative expectations and macroeconomic dynamics: Evidence from an estimated DSGE model

Extrapolative expectations and macroeconomic dynamics: Evidence from an estimated DSGE model

Expected returns and expected dividend growth in Europe: Legal origin, institutional, and financial determinants

Fluctuations in the UK equity market: what drives stock returns?

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