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The Present Value Model With Stochastic Discount Rate And An Ann Process For Broad Dividends

Author

Listed:
  • MAN FU

    (Department of Economics, University Park DM 320A, Florida International University, Miami, FL 33199, USA)

  • PRASAD V. BIDARKOTA

    (Department of Economics, University Park DM 320A, Florida International University, Miami, FL 33199, USA)

Abstract

This paper uses an artificial neural network (ANN) model to forecast broad dividends, and computes fundamental stock prices with a stochastic discount factor (SDF). Broad dividends are used because they measure payouts to shareholders more accurately. Since nonlinearity is found in broad dividends, an ANN process is fit to these. Empirical results show that the consumption-based broad dividends model with ANN forecasting procedure predicts fundamental prices better, compared with models using linear dividends process, narrow dividends, or a constant discount factor. Nonetheless, actual stock prices remain largely detached from fundamental prices. Deviations between actual and fundamental prices, positive or negative, are found to coincide with business cycles, a result not consistent with alternative models considered in the paper.

Suggested Citation

  • Man Fu & Prasad V. Bidarkota, 2011. "The Present Value Model With Stochastic Discount Rate And An Ann Process For Broad Dividends," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 6(01), pages 1-20.
    • Handle: RePEc:wsi:afexxx:v:06:y:2011:i:01:n:s2010495211500011
    DOI: 10.1142/S2010495211500011
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    References listed on IDEAS

    as
    1. Peter C. B. Phillips & Yangru Wu & Jun Yu, 2011. "EXPLOSIVE BEHAVIOR IN THE 1990s NASDAQ: WHEN DID EXUBERANCE ESCALATE ASSET VALUES?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(1), pages 201-226, February.
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    More about this item

    Keywords

    Stock prices; present value model; stochastic discount factor; broad dividends; artificial neural network (ANN); E44; E47; G12; G17;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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