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Managing funds in the US market: how to distinguish between transitory distortions and structural changes in the stock prices?

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  • Catherine Bruneau
  • Ch. Duval-Kieffer
  • J. P. Nicolai
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    Abstract

    The paper reports estimates of a reliable fundamental value of the S&P index, standing for a long run target value in Error-Correction Modelling of the dynamics of subsequent returns. The Present Value Model suggests two fundamentals: dividends and a discount rate factor, specified as a risk free rate plus an ex ante risk premium, to capture structural breaks in the expectations. The dates of the shifts are identified by estimating recursively a cointegration relationship. Monte Carlo simulations are used to compute appropriate statistics for stationarity tests. The predictive performance of the Error-Correcting Model is then used to implement winning portfolio-investment strategies.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/13518470050020815
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal The European Journal of Finance.

    Volume (Year): 6 (2000)
    Issue (Month): 2 ()
    Pages: 146-162

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    Handle: RePEc:taf:eurjfi:v:6:y:2000:i:2:p:146-162

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    Web page: http://www.tandfonline.com/REJF20

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    Related research

    Keywords: Long Run Target Cointegration Structural Change Asset Management;

    References

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    1. John Y. Campbell & Robert J. Shiller, 1986. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," NBER Working Papers 2100, National Bureau of Economic Research, Inc.
    2. John Y. Campbell & John H. Cochrane, 1994. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," CRSP working papers 412, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    3. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
    4. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, vol. 22(1), pages 3-25, October.
    5. Campbell, John Y, 1991. "A Variance Decomposition for Stock Returns," Economic Journal, Royal Economic Society, vol. 101(405), pages 157-79, March.
    6. Robert J. Shiller, 1980. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," NBER Working Papers 0456, National Bureau of Economic Research, Inc.
    7. David M. Cutler & James M. Poterba & Lawrence H. Summers, 1990. "Speculative Dynamics," NBER Working Papers 3242, National Bureau of Economic Research, Inc.
    8. Bruneau, C., 1996. "Impulse-Response Analysis in Econometrics," Papers 9613, Paris X - Nanterre, U.F.R. de Sc. Ec. Gest. Maths Infor..
    9. C. Bruneau, 1996. "Impulse-response analysis in econometrics," THEMA Working Papers 96-13, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    10. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
    11. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
    12. Myron J. Gordon & Eli Shapiro, 1956. "Capital Equipment Analysis: The Required Rate of Profit," Management Science, INFORMS, vol. 3(1), pages 102-110, October.
    13. Gregory, Allan W. & Nason, James M. & Watt, David G., 1996. "Testing for structural breaks in cointegrated relationships," Journal of Econometrics, Elsevier, vol. 71(1-2), pages 321-341.
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