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Non-linear cointegration between stock prices and dividends

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.

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Article provided by Taylor & Francis Journals in its journal Applied Economics Letters.

Volume (Year): 10 (2003)
Issue (Month): 7 ()
Pages: 401-405

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Handle: RePEc:taf:apeclt:v:10:y:2003:i:7:p:401-405
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  1. Meese, Richard A & Rose, Andrew K, 1991. "An Empirical Assessment of Non-linearities in Models of Exchange Rate Determination," Review of Economic Studies, Wiley Blackwell, vol. 58(3), pages 603-19, May.
  2. Peter C.B. Phillips & Sam Ouliaris, 1987. "Asymptotic Properties of Residual Based Tests for Cointegration," Cowles Foundation Discussion Papers 847R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1988.
  3. Froot, Kenneth A & Obstfeld, Maurice, 1991. "Intrinsic Bubbles: The Case of Stock Prices," American Economic Review, American Economic Association, vol. 81(5), pages 1189-214, December.
  4. Kiyotaki, N., 1990. "Learning And The Value Of The Firm," Working papers 90-16, Wisconsin Madison - Social Systems.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. Nobuhiro Kiyotaki, 1990. "Learning and the Value of the Firm," NBER Working Papers 3480, National Bureau of Economic Research, Inc.
  10. 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.
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