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Modeling the Dynamics between Stock Price and Dividend: An Endogenous Regime Switching Approach

Author

Listed:
  • Heejoon Han

    (Sungkyunkwan University)

  • Na Kyeong Lee

    (Sungkyunkwan University)

Abstract

This study considers a new error correction model (ECM) for stock price and dividend, which accommodates nonlinearities in both long- and short-run relationships. First, timevarying coefficient cointegration is adopted to explain the nonlinear long-run relationship between stock price and dividend. Second, the model allows for endogenous regime switching to describe the short-run relationship. The empirical application on the S&P 500 Index and dividend shows that our model fits the data significantly better than existing models and provides estimates with meaningful interpretations. In addition, the linear cointegration is unsuitable to describe the long-run relationship, and the ECM with endogenous regime switching better explains the data than that with conventional Markov switching. An extract latent factor specifically reveals the periods for each regime, and the periods of high-volatility regime include the NBER recession periods and certain periods of financial crisis.

Suggested Citation

  • Heejoon Han & Na Kyeong Lee, 2018. "Modeling the Dynamics between Stock Price and Dividend: An Endogenous Regime Switching Approach," Korean Economic Review, Korean Economic Association, vol. 34, pages 213-235.
    • Handle: RePEc:kea:keappr:ker-20180701-34-2-05
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Endogenous Regime Switching; Time-Varying Coefficient Cointegration; Error Correction Model; Stock Price; Dividend;
    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
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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