This paper finds that equity prices, dividends and gilt yields are cointegrated, having a unique cointegrating vector. From the associated error correction formulation, it is found that gilt yields are exogenous and that equity prices respond quickly, and negatively to a gilt shock. Restriction can be placed on the cointegrating vector that enables the equilibrium relationship to be one in which gilt and dividend yields are in constant proportion to each other. This ratio is equivalent to the "confidence factor" used by investment analysts in the 1950s and provides control limits for monitoring the movement of equity prices. Copyright 1991 by Scottish Economic Society.
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Volume (Year): 38 (1991) Issue (Month): 3 (August) Pages: 242-55 Download reference. The following formats are available: HTML
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