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Another Look to the Price-Dividend Ratio: A Markov-Switching Approach

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  • Vázquez Pérez, Jesús
  • Regúlez Castillo, Marta
  • Londoño Yarce, Juan Miguel

Abstract

This paper analyzes the stationarity of this ratio in the context of a Markov-switching model à la Hamilton (1989) where an asymmetric speed of adjustment is introduced. This particular specification robustly supports a nonlinear reversion process and identifies two relevant episodes: the post-war period from the mid-50’s to the mid-70’s and the so called “90’s boom†period. A three-regime Markov-switching model displays the best regime identification and reveals that only the first part of the 90’s boom (1985-1995) and the post-war period are near-nonstationary states. Interestingly, the last part of the 90’s boom (1996-2000), characterized by a growing price-dividend ratio, is entirely attributed to a regime featuring a highly reverting process.

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Paper provided by University of the Basque Country - Department of Foundations of Economic Analysis II in its series DFAEII Working Papers with number 2008-09.

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Date of creation: Jul 2008
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Handle: RePEc:ehu:dfaeii:200809

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Postal: Dpto. de Fundamentos del Análisis Económico II, = Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain
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Keywords: Markov regime-switching; price-dividend ratio stationarity;

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