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Asymmetric adjustment and smooth breaks in dividend yields: Evidence from international stock markets

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  • Chen, Shyh-Wei
  • Xie, Zixiong

Abstract

Based on a present value model with time-varying expected returns, this paper examines the bubble-like behavior in the logarithm of the dividend yields of eight international stock markets under the assumptions of an asymmetric adjustment and structural breaks, respectively. To this end, we adopt a number of nonlinear unit root tests and propose a new test for the null hypothesis of a unit root against the alternative hypothesis that encompasses the asymmetric adjustment and two smooth breaks in the trend at the same time. Among the main results, it is found that the hypothesis of a unit root cannot be rejected for the logarithm of the dividend yields of these stock markets based on the conventional linear unit root tests. However, empirical results favor the presence of a structural break for the indexes of the DAX 30, FTSE Denmark and Nikkei 500. With the exception of BEL 20, the empirical results do not demonstrate strong evidence of an asymmetric adjustment for the logarithm of the dividend yield, implying that the hypothesis of the periodically collapsing bubbles is not empirically verified for these stock markets.

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  • Chen, Shyh-Wei & Xie, Zixiong, 2017. "Asymmetric adjustment and smooth breaks in dividend yields: Evidence from international stock markets," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 339-354.
  • Handle: RePEc:eee:reveco:v:48:y:2017:i:c:p:339-354
    DOI: 10.1016/j.iref.2016.12.001
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    Keywords

    Present value model; Bubble; Asymmetric adjustment; Structural break;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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