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Testing the Present Value Model of Farmland Prices

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  • Falk, Barry

Abstract

This paper examines the adequacy of the constant expected returns version of the present value model of farm real estate and rent data over a 1921-1985 sample period. The nature of the model's failure to explain these data is remarkably similar to the kind of model failure that Campbell and Shiller [1987] uncovered in their study of U.S. stock market price and dividend time series. More specifically, real farmland prices tend to overreact to movements in real cash rents, falling much too far during periods of declining rents and rising much too far during periods of increasing rents.

Suggested Citation

  • Falk, Barry, 1989. "Testing the Present Value Model of Farmland Prices," ISU General Staff Papers 198902010800001197, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genstf:198902010800001197
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    References listed on IDEAS

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    1. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    2. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, vol. 71(3), pages 421-436, June.
    3. Phillips, Peter C B & Park, Joon Y, 1988. "On the Formulation of Wald Tests of Nonlinear Restrictions," Econometrica, Econometric Society, vol. 56(5), pages 1065-1083, September.
    4. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    5. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1062-1088, October.
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    Cited by:

    1. Chen, Y. & Chen, K. & Zhong, F., 2018. "Farm Subsidy and Farmland Cash Rent under Rapid Urbanization: Evidence from Chinese Farm Household Panel 2004-2013," 2018 Conference, July 28-August 2, 2018, Vancouver, British Columbia 277513, International Association of Agricultural Economists.

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