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Interpreting Cointegrated Models

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Author Info
John Y. Campbell
Robert J. Shiller

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Abstract

Error-correction models for cointegrated economic variables are commonly interpreted as reflecting partial adjustment of one variable to another. We show that error-correction models may also arise because one variable forecasts another. Reduced-form estimates of error-correction models cannot be used to distinguish these interpretations. In an application, we show that the estimated coefficients in the Marsh-Merton [I9871 error-correction model of dividend behavior in the stock market are roughly implied by a near-rational expectations model wherein dividends are persistent and prices are disturbed by some persistent random noise. Their results thus do not demonstrate partial adjustment or "smoothing" by managers, but may reflect little more than the persistence of dividends and the noisiness of prices.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2568.

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Date of creation: May 1989
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Handle: RePEc:nbr:nberwo:2568

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This page was last updated on 2009-11-25.

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