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Switching Equilibria: The Present Value Model for Stock Prices Revisited

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  • Gutiérrez Huerta, María José
  • Vázquez Pérez, Jesús

Abstract

This paper analyzes the different dynamic features displayed by alternative RE equilibria and how these features change for small perturbations of the dividend process parameters. Using historical US data and structural estimation we test for the presence of feedback from stock prices to dividends. In addition, we empirically study whether the excess of volatility in stock prices is due to (i) regime-switching in the dividend process studied by Driffill and Sola (1998), (ii) switching equilibria suggested by Timmermann (1994) or (iii) a combination of these two possibilities. The empirical results provide evidence of a small but very significant presence of feedback from stock prices to dividends. Moreover, when analyzing different subsamples we find evidence of both regime-switching in the dividend process and switching equilibria.

Suggested Citation

  • Gutiérrez Huerta, María José & Vázquez Pérez, Jesús, 2002. "Switching Equilibria: The Present Value Model for Stock Prices Revisited," BILTOKI 1134-8984, Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística).
    • Handle: RePEc:ehu:biltok:5823
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