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

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  • Man Fu

    (Florida International University, USA)

  • Prasad V. Bidarkota

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

Abstract

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.

Suggested Citation

  • Man Fu & Prasad V. Bidarkota, 2011. "Periodically Collapsing Bubbles in Stock Prices Cointegrated with Broad Dividends and Macroeconomic Factors," JRFM, MDPI, vol. 4(1), pages 1-36, December.
    • Handle: RePEc:gam:jjrfmx:v:4:y:2011:i:1:p:97-132:d:28375
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