IDEAS home Printed from https://ideas.repec.org/p/cte/wsrepe/4544.html
   My bibliography  Save this paper

Non-exact present value relations

Author

Listed:
  • Gonzalo, Jesús
  • González Rozada, Martín

Abstract

One of the most cornmonly used and, at the same time. rejected models in finance and macroeconomics is the exact present value model (PVM), where a variable Yt is expressed as the expected value at time t of the sum of discounted future values of another variable Xt. This paper generalizes the PVM by making it non-exact (NEPVM) in a simple way, allowing us to study situations with time varying discount factors, transitory deviations from the exact PVM, as well as situations with correlated market returns. The proposed NEPVM satisfies all the equilibrium conditions the exact PVM does, but at the same time it is more robust in the sense that rejections produced by the standard volatility and cross-equation restriction tests are not enough to reject the NEPVM. The paper presents the new variance bounds and cross-equation restrictions implied by the NEPVM and it shows how to test them. This paper also shows how to discriminate between the exact PVM and the NEPVM by testing for a deeper level of cointegration: multicointegration. The paper finished by analyzing empirically the cases of stock prices and dividens. short-and long-term interest rates and farmland prices. Although the exact PVM is rejected in the first two examples, as the literature has largely reported, we are unable to reject the NEPVM. This fact, together with the theoretical results contained in the paper, suggests that the pro po sed NEPVM could be compatible with sorne of the empírical findings in the literature.

Suggested Citation

  • Gonzalo, Jesús & González Rozada, Martín, 1996. "Non-exact present value relations," DES - Working Papers. Statistics and Econometrics. WS 4544, Universidad Carlos III de Madrid. Departamento de Estadística.
    • Handle: RePEc:cte:wsrepe:4544
    as

    Download full text from publisher

    File URL: https://e-archivo.uc3m.es/bitstream/handle/10016/4544/ws965021.pdf?sequence=1
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Campbell, John Y, 1987. "Does Saving Anticipate Declining Labor Income? An Alternative Test of the Permanent Income Hypothesis," Econometrica, Econometric Society, vol. 55(6), pages 1249-1273, November.
    2. Kenneth D. West, 1987. "A Specification Test for Speculative Bubbles," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(3), pages 553-580.
    3. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    4. Mankiw, N Gregory & Romer, David & Shapiro, Matthew D, 1985. "An Unbiased Reexamination of Stock Market Volatility," Journal of Finance, American Finance Association, vol. 40(3), pages 677-687, July.
    5. Hamilton, James D & Flavin, Marjorie A, 1986. "On the Limitations of Government Borrowing: A Framework for EmpiricalTesting," American Economic Review, American Economic Association, vol. 76(4), pages 808-819, September.
    6. John Campbell & Angus Deaton, 1989. "Why is Consumption So Smooth?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 56(3), pages 357-373.
    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. Engsted, Tom, 1993. "Cointegration and Cagan's Model of Hyperinflation under Rational Expectations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(3), pages 350-360, August.
    9. Gregory, Allan W & Veall, Michael R, 1985. "Formulating Wald Tests of Nonlinear Restrictions," Econometrica, Econometric Society, vol. 53(6), pages 1465-1468, November.
    10. John Y. Campbell & Robert J. Shiller, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(3), pages 495-514.
    11. Joe Mattey and Richard Meese., 1986. "Empirical Assessment of Present Value Relations," Research Program in Finance Working Papers 162, University of California at Berkeley.
    12. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    13. Barry Falk, 1991. "Formally Testing the Present Value Model of Farmland Prices," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 73(1), pages 1-10.
    14. Marjorie Flavin, 1993. "The Excess Smoothness of Consumption: Identification and Interpretation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(3), pages 651-666.
    15. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October.
    16. Falk, Barry L., 1991. "Formally Testing the Present Value Model of Farmland Prices," Staff General Research Papers Archive 11093, Iowa State University, Department of Economics.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. González, Martín & Gonzalo, Jesús, 2000. "Econometric implications of non-exact present value models," DE - Documentos de Trabajo. Economía. DE 16009, Universidad Carlos III de Madrid. Departamento de Economía.
    2. Engsted, Tom, 2002. "Measures of Fit for Rational Expectations Models," Journal of Economic Surveys, Wiley Blackwell, vol. 16(3), pages 301-355, July.
    3. Hecq, A.W. & Issler, J.V., 2012. "A common-feature approach for testing present-value restrictions with financial data," Research Memorandum 006, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    4. Gilbert Colletaz & Jean-Pierre Gourlaouen, 1990. "Coïntégration et structure par terme des taux d'intérêt," Revue Économique, Programme National Persée, vol. 41(4), pages 687-712.
    5. Cuthbertson, Keith, 1996. "The Expectations Hypothesis of the Term Structure: The UK Interbank Market," Economic Journal, Royal Economic Society, vol. 106(436), pages 578-592, May.
    6. Tim Bollerslev & Robert J. Hodrick, 1992. "Financial Market Efficiency Tests," NBER Working Papers 4108, National Bureau of Economic Research, Inc.
    7. Engsted, Tom, 2002. "Measuring noise in the Permanent Income Hypothesis," Journal of Macroeconomics, Elsevier, vol. 24(3), pages 353-370, September.
    8. Issler, João Victor & Rodrigues, Claudia & Burjack, Rafael, 2014. "Using common features to understand the behavior of metal-commodity prices and forecast them at different horizons," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 310-335.
    9. repec:zbw:bofrdp:1995_015 is not listed on IDEAS
    10. John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," The Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 195-228.
    11. Fabio Araujo & Joao Victor Issler, 2005. "Estimating the Stochastic Discount Factor without a Utility Function," Computing in Economics and Finance 2005 202, Society for Computational Economics.
    12. Takala, Kari, 1995. "Permanent income hypothesis and saving in Finland," Research Discussion Papers 15/1995, Bank of Finland.
    13. Jim Malley & Hassan Molana, "undated". "The Permanent Income Hypothesis Revisited: Reconciling Evidence from Aggregate Data with the Representative Consumer Behaviour," ICMM Discussion Papers 48, Department of Economics University of Strathclyde.
    14. Barbara Rossi, 2007. "Expectations hypotheses tests at Long Horizons," Econometrics Journal, Royal Economic Society, vol. 10(3), pages 554-579, November.
    15. Enrique Sentana, 1993. "The econometrics of the stock market I: rationality tests," Investigaciones Economicas, Fundación SEPI, vol. 17(3), pages 401-420, September.
    16. Éric Jondeau, 2001. "La théorie des anticipations de la structure par terme permet-elle de rendre compte de l'évolution des taux d'intérêt sur euro-devise ?," Annals of Economics and Statistics, GENES, issue 62, pages 139-174.
    17. Takala, Kari, 1995. "Permanent income hypothesis and saving in Finland," Bank of Finland Research Discussion Papers 15/1995, Bank of Finland.
    18. repec:adr:anecst:y:2001:i:62:p:07 is not listed on IDEAS
    19. Emilio Fernandez-Corugedo & Simon Price & Andrew Blake, 2003. "The dynamics of consumers' expenditure: the UK consumption ECM redux," Bank of England working papers 204, Bank of England.
    20. Alessie, Rob & Lusardi, Annamaria, 1997. "Saving and income smoothing: Evidence from panel data," European Economic Review, Elsevier, vol. 41(7), pages 1251-1279, July.
    21. Richard H. Clarida & Lucio Sarno & Mark P. Taylor & Giorgio Valente, 2006. "The Role of Asymmetries and Regime Shifts in the Term Structure of Interest Rates," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1193-1224, May.
    22. Martin D. Evans & Karen K. Lewis, 1992. "Peso Problems and Heterogeneous Trading: Evidence from Excess Returns in Foreign Exchange and Euromarkets," Working Papers 92-13, New York University, Leonard N. Stern School of Business, Department of Economics.

    More about this item

    Keywords

    Multicointegration;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cte:wsrepe:4544. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ana Poveda (email available below). General contact details of provider: http://portal.uc3m.es/portal/page/portal/dpto_estadistica .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.