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The Temporal Stability of Dividends and Stock Prices: Evidence from the Likelihood Function

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Author Info
DeJong, David N
Whiteman, Charles H

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Abstract

The debate over whether the expected present value of dividends adequately describes stock prices hinges in part on whether dividends are trend-stationary or integrated processes: it does not if dividends are trend-stationary; it does if they are integrated. This paper argues that classical statistical tests only indicate that there is not sufficient evidence to reject either specification and provides Bayesian analyses designed to reveal the relative support the data give to the two specifications. The analysis suggests that dividends and prices are more likely to be trend-stationary than integrated, leaving the determination of prices a puzzle. Copyright 1991 by American Economic Association.

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Publisher Info
Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 81 (1991)
Issue (Month): 3 (June)
Pages: 600-617
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Handle: RePEc:aea:aecrev:v:81:y:1991:i:3:p:600-617

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  2. Gary Koop & Herman K. van Dijk & Henk Hoek, 1997. "Testing for Integration using Evolving Trend and Seasonals Models: A Bayesian Approach," Tinbergen Institute Discussion Papers 97-078/4, Tinbergen Institute. [Downloadable!]
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  3. Matthew Spiegel, 1996. "Stock Price Volatility in a Multiple Security Overlapping Generations Model," Finance 9608002, EconWPA. [Downloadable!]
  4. Zhijie Xiao & Peter C.B. Phillips, 1997. "An ADF Coefficient Test for a Unit Root in ARMA Models of Unknown Order with Empirical Applications to the U.S. Economy," Cowles Foundation Discussion Papers 1161, Cowles Foundation, Yale University. [Downloadable!]
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  6. Donald W.K. Andrews & Hong-Yuan Chen, 1992. "Approximately Median-Unbiased Estimation of Autoregressive Models with Applications to U.S. Macroeconomic and Financial Time Series," Cowles Foundation Discussion Papers 1026, Cowles Foundation, Yale University. [Downloadable!]
  7. Lewellen, Jonathan, 2003. "Predicting Returns With Financial Ratios," Working papers 4374-02, Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
  8. Peter C.B. Phillips, 1991. "Unit Roots," Cowles Foundation Discussion Papers 998, Cowles Foundation, Yale University. [Downloadable!]
  9. F. Aparicio & A. Escribano, 1998. "Information-Theoretic Analysis of Serial Dependence and Cointegration," Studies in Nonlinear Dynamics & Econometrics, Berkeley Electronic Press, vol. 3(3), pages 119-140. [Downloadable!] (restricted)
  10. N. Vijayamohanan Pillai, 2001. "Electricity demand analysis and forecasting: The tradition is questioned," Centre for Development Studies, Trivendrum Working Papers 312, Centre for Development Studies, Trivendrum, India. [Downloadable!]
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  13. Joseph G. Haubrich, 1991. "Financial efficiency and aggregate fluctuations: an exploration," Economic Review, Federal Reserve Bank of Cleveland, issue Q IV, pages 25-36. [Downloadable!]
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