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Testing The Present Value Model Of Equity Prices For The Uk Stock Market

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  • Terence C. Mills

Abstract

This paper applies present value tests to the UK stock market. Using monthly data from 1965 to 1990 on real equity price and dividend indices, it is found that the restrictions imposed by the present value model on a vector autoregression comprised of the ‘spread’ between prices and dividends and the change in real dividends can be rejected both for the complete sample period and for a shorter sample which omits the early years of dividend control and the run up to and aftermath of the stock market ‘Crash’ of October 1987. These tests are supplemented by informal methods for evaluating the ‘fit’ of the present value model: the observed spread is found to move ‘too much’, so that deviations from the model are persistent and long‐lasting.

Suggested Citation

  • Terence C. Mills, 1993. "Testing The Present Value Model Of Equity Prices For The Uk Stock Market," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 20(6), pages 803-813, November.
    • Handle: RePEc:bla:jbfnac:v:20:y:1993:i:6:p:803-813
    DOI: 10.1111/j.1468-5957.1993.tb00294.x
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