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Periodically Collapsing Bubbles in Stock Prices Cointegrated with Broad Dividends and Macroeconomic Factors

  • Man Fu

    ()

    (Florida International University, USA)

  • Prasad V. Bidarkota

    ()

    (Department of Economics, University Park DM 320A, Florida International University, Miami, FL 33199, USA)

Registered author(s):

    We study fluctuations in stock prices using a framework derived from the present value model augmented with a macroeconomic factor. The fundamental value is derived as the expected present discounted value of broad dividends that include, in addition to traditional cash dividends, other payouts to shareholders. A stochastic discount factor motivated by the consumption-based asset pricing model is utilized. A single macroeconomic factor, namely the output gap determines the non-fundamental component of stock prices. A resulting trivariate Vector Autoregression (TVAR) model of stock prices, broad dividends, and the output gap shows evidence of cointegration in the DJIA and S&P 500 index data. Nonetheless, a sup augmented Dickey-Fuller test reveals existence of periodically collapsing bubbles in S&P 500 data during the late 1990s.

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    Article provided by MDPI, Open Access Journal in its journal Journal of Risk and Financial Management.

    Volume (Year): 4 (2011)
    Issue (Month): 1 (December)
    Pages: 97-132

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    Handle: RePEc:gam:jjrfmx:v:4:y:2011:i:1:p:97-132:d:28375
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