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Appears in Collections:Economics Journal Articles
Peer Review Status: Refereed
Title: Bubbles in the dividend-price ratio? Evidence from an asymmetric exponential smooth-transition model
Author(s): McMillan, David
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Keywords: stock market dynamics
present value model
asymmetric-ESTR model
behavioural finance
Issue Date: Mar-2007
Date Deposited: 27-Feb-2017
Citation: McMillan D (2007) Bubbles in the dividend-price ratio? Evidence from an asymmetric exponential smooth-transition model. Journal of Banking and Finance, 31 (3), pp. 787-804.
Abstract: Recent stock price movements have led to a re-examination of the present value model. An increasing belief is that although dividends and prices are indeed cointegrated, they may exhibit non-linear dynamics in the process of reversion. This paper implements an empirical model designed to capture two possible explanations for such non-linearity, namely transaction costs and noise traders. Utilising data from a number of countries we show that the dynamics of the log dividend yield are, first, characterised by an inner random walk regime, where the benefits of engaging in trade do not outweigh the costs and so the process moves randomly. Second, a reverting outer regime where the dynamics of reversion differ between positive and negative deviations, such that price rises greater than the level supported by dividends exhibit a greater degree of persistence than price falls relative to dividends.
DOI Link: 10.1016/j.jbankfin.2006.02.006
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