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The Dividend Pricing Model: New Evidence from the Korean Housing Market

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  • Min Hwang
  • John Quigley

Abstract

"There is now considerable research devoted to testing the dividend pricing model as a predictor of the actual prices of shares traded in financial markets. A general finding is that present value models are not good predictors of asset prices. This lack of fit is interpreted as excess volatility, or alternatively as a failure of the maintained hypothesis that the discount rate for shares is constant. Considerable discretion in the payout of dividends is vested in the managers of firms who may follow rules of thumb in awarding dividends. Managers may also be reluctant to increase dividends unless they expect that the payout can be maintained subsequently. The failure of the present value model can thus be attributed to the dividend process followed by firm managers with considerable discretion over timing and payout forms, which may be substantially different from the process assumed in econometric models. In this paper, we present rather powerful tests of the dividend pricing relation using a unique data set in which dividends are set by market forces independent of managers' preferences. We rely, not upon observations on shares traded on organized financial markets, but on observations taken from the market for condominium dwellings in Korea ñ perhaps the only market in which dividends are publicly available to consumers and investors for assets bought and sold over short-term intervals. We test the present value model using large panels of observations on asset price movements and dividends. First, we analyze the cross sectional characteristics of returns to investment in housing of differing types and locations, noting the importance of lags and analyzing simple investment strategies. Second, we analyze the ""dividend-price ratio model"" proposed by Campbell and Shiller (1988) using panels of housing returns differentiated by type and location. In contrast with much of the existing literature, we find broad support for the dividend pricing model in this more general framework. Lastly, the third body of evidence we present involves tests for the stationarity of these ratios in each of our panels. We conduct a series of unit root tests based upon panels of investment returns and dividends, differentiated by type of housing, investigating the stationarity of dividend price ratios. We find that most of the time series are consistent with stationary processes. This provides further support for our finding that the dividend pricing model is consistent with the pattern of housing returns observed in the Korean housing market. "

Suggested Citation

  • Min Hwang & John Quigley, 2005. "The Dividend Pricing Model: New Evidence from the Korean Housing Market," ERES eres2005_203, European Real Estate Society (ERES).
  • Handle: RePEc:arz:wpaper:eres2005_203
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    File URL: https://eres.architexturez.net/doc/oai-eres-id-eres2005-203
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    References listed on IDEAS

    as
    1. Diba, Behzad T & Grossman, Herschel I, 1988. "Explosive Rational Bubbles in Stock Prices?," American Economic Review, American Economic Association, vol. 78(3), pages 520-530, June.
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    3. Marsh, Terry A & Merton, Robert C, 1986. "Dividend Variability and Variance Bounds Tests for the Rationality ofStock Market Prices," American Economic Review, American Economic Association, vol. 76(3), pages 483-498, June.
    4. Brent W. Ambrose & Sunwoong Kim, 2003. "Modeling the Korean Chonsei Lease Contract," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 31(1), pages 53-74, March.
    5. Ackert, Lucy F & Smith, Brian F, 1993. " Stock Price Volatility, Ordinary Dividends, and Other Cash Flows to Shareholders," Journal of Finance, American Finance Association, vol. 48(4), pages 1147-1160, September.
    6. repec:cdl:ucsbec:13-89 is not listed on IDEAS
    7. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1062-1088, October.
    8. LeRoy, Stephen F, 1989. "Efficient Capital Markets and Martingales," Journal of Economic Literature, American Economic Association, vol. 27(4), pages 1583-1621, December.
    9. Hamilton, James D. & Whiteman, Charles H., 1985. "The observable implications of self-fulfilling expectations," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 353-373, November.
    10. Yoosoon Chang & Wonho Song, 2002. "Panel Unit Root Tests in the Presence of Cross-Sectional Dependency and Heterogeneity," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 B5-2, International Conferences on Panel Data.
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    Citations

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    Cited by:

    1. Hoon Cho & Kyung-Hwan Kim & James Shilling, 2012. "Seemingly Irrational but Predictable Price Formation in Seoul’s Housing Market," The Journal of Real Estate Finance and Economics, Springer, vol. 44(4), pages 526-542, May.
    2. Philippe Bracke, 2013. "House Prices and Rents: Micro Evidence from a Matched Dataset in Central London_x0003_," ERSA conference papers ersa13p112, European Regional Science Association.
    3. Christian Rehring & Steffen Sebastian, 2011. "Dynamics of commercial real estate asset markets, return volatility and the investment horizon," Journal of Property Research, Taylor & Francis Journals, vol. 28(4), pages 291-315, June.
    4. repec:eee:touman:v:33:y:2012:i:5:p:1141-1147 is not listed on IDEAS
    5. repec:gam:jsusta:v:8:y:2016:i:5:p:415:d:69022 is not listed on IDEAS
    6. Park, Donghyun & Xiao, Qin, 2009. "Housing Prices and the Role of Speculation: The Case of Seoul," ADB Economics Working Paper Series 146, Asian Development Bank.
    7. MeiChi Huang, 2013. "The Role of People’s Expectation in the Recent US Housing Boom and Bust," The Journal of Real Estate Finance and Economics, Springer, vol. 46(3), pages 452-479, April.
    8. Philippe Bracke, 2015. "House Prices and Rents: Microevidence from a Matched Data Set in Central London," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(2), pages 403-431, June.
    9. Hjalmarsson, Erik & Hjalmarsson, Randi, 2009. "Efficiency in housing markets: Which home buyers know how to discount?," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2150-2163, November.
    10. Charles Leung, 2007. "Equilibrium Correlations of Asset Price and Return," The Journal of Real Estate Finance and Economics, Springer, vol. 34(2), pages 233-256, February.
    11. Sae Park & Doo Bahng & Yun Park, 2010. "Price Run-up in Housing Markets, Access to Bank Lending and House Prices in Korea," The Journal of Real Estate Finance and Economics, Springer, vol. 40(3), pages 332-367, April.
    12. repec:eee:juecon:v:105:y:2018:i:c:p:107-120 is not listed on IDEAS
    13. Sanghyun Kim & Juhyung Kim & Jaejun Kim, 2016. "Structural Changes in the Korean Housing Market before and after Macroeconomic Fluctuations," Sustainability, MDPI, Open Access Journal, vol. 8(5), pages 1-20, April.
    14. Kim, Jan R. & Lim, Gieyoung, 2016. "Fundamentals and rational bubbles in the Korean housing market: A modified present-value approach," Economic Modelling, Elsevier, vol. 59(C), pages 174-181.
    15. Rose N. Lai & Robert A. Van Order, 2010. "Momentum and House Price Growth in the United States: Anatomy of a Bubble," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 38(4), pages 753-773, Winter.
    16. Heeho Kim & SaeWoon Park & Sun Hye Lee, 2012. "House Price and Bank Lending in a Premium Submarket in Korea," International Real Estate Review, Asian Real Estate Society, vol. 15(1), pages 1-42.
    17. repec:eee:regeco:v:68:y:2018:i:c:p:36-45 is not listed on IDEAS
    18. Qin Xiao & Donghyun Park, 2010. "Seoul housing prices and the role of speculation," Empirical Economics, Springer, vol. 38(3), pages 619-644, June.

    More about this item

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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