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Non-linear cointegration between stock prices and dividends

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  • A. Kanas

Abstract

This article uses the ACE algorithm to non-linearly transform stock prices and dividends for the USA for the period 1871-1999. It finds strong evidence of cointegration between the transformed variables, which can be characterized as non-linear cointegration. It concludes that departures from the linear present value model may be explained by misspecification of the model, which is attributed to the absence of appropriate nonlinear transformations of the variables. Our findings are in line with models that introduce nonlinearities in the relation between stock prices and dividends.

Suggested Citation

  • A. Kanas, 2003. "Non-linear cointegration between stock prices and dividends," Applied Economics Letters, Taylor & Francis Journals, vol. 10(7), pages 401-405.
  • Handle: RePEc:taf:apeclt:v:10:y:2003:i:7:p:401-405
    DOI: 10.1080/1350485022000044020
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    References listed on IDEAS

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    1. repec:bla:restud:v:57:y:1990:i:1:p:99-125 is not listed on IDEAS
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    5. Summers, Lawrence H, 1986. " Does the Stock Market Rationally Reflect Fundamental Values?," Journal of Finance, American Finance Association, vol. 41(3), pages 591-601, July.
    6. Froot, Kenneth A & Obstfeld, Maurice, 1991. "Intrinsic Bubbles: The Case of Stock Prices," American Economic Review, American Economic Association, vol. 81(5), pages 1189-1214, December.
    7. Cecchetti, Stephen G & Lam, Pok-sang & Mark, Nelson C, 1990. "Mean Reversion in Equilibrium Asset Prices," American Economic Review, American Economic Association, vol. 80(3), pages 398-418, June.
    8. Paul R. Krugman, 1987. "Trigger Strategies and Price Dynamics in Equity and Foreign Exchange Markets," NBER Working Papers 2459, National Bureau of Economic Research, Inc.
    9. Granger, Clive W J & Hallman, Jeffrey J, 1991. "Long Memory Series with Attractors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 53(1), pages 11-26, February.
    10. Phillips, P. C. B. & Ouliaris, S., 1988. "Testing for cointegration using principal components methods," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 205-230.
    11. Kiyotaki, N., 1990. "Learning And The Value Of The Firm," Working papers 90-16, Wisconsin Madison - Social Systems.
    12. Phillips, Peter C B & Ouliaris, S, 1990. "Asymptotic Properties of Residual Based Tests for Cointegration," Econometrica, Econometric Society, vol. 58(1), pages 165-193, January.
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    Cited by:

    1. Vicente Esteve & Manuel Navarro-Ibáñez & María A. Prats, 2013. "The present value model of US stock prices revisited: long-run evidence with structural breaks, 1871-2010," Working Papers 04/13, Instituto Universitario de Análisis Económico y Social.
    2. Vasco Gabriel & Luis Martins, 2011. "Cointegration tests under multiple regime shifts: An application to the stock price–dividend relationship," Empirical Economics, Springer, vol. 41(3), pages 639-662, December.
    3. Kim Hiang Liow, 2008. "Financial Crisis and Asian Real Estate Securities Market Interdependence: Some Additional Evidence," Journal of Property Research, Taylor & Francis Journals, vol. 25(2), pages 127-155, November.
    4. Vicente Esteve & Manuel Navarro-Ibáñez & María A. Prats, 2013. "The present value model of U.S. stock prices revisited: long-run evidence with structural breaks, 1871-2010," Working Papers 1305, Department of Applied Economics II, Universidad de Valencia.

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