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Intrinsic bubbles: the case of stock prices: a comment

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  • Lucy F. Ackert
  • William C. Hunter

Abstract

Some recent empirical evidence suggests that stock prices are not properly modelled as the present discounted value of expected dividends and that empirical models incorporating nonlinear bubble components better fit the data. In this paper we show that the nonlinearity in the relationship between prices and dividends may arise from how managers choose dividend payout. In particular, we propose a model of managed dividends which can explain observed long-term trends in stock prices. This model of managed dividends is shown to be observationally equivalent to the popular intrinsic bubbles model.

Suggested Citation

  • Lucy F. Ackert & William C. Hunter, 1999. "Intrinsic bubbles: the case of stock prices: a comment," Working Paper Series WP-99-26, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhwp:wp-99-26
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    1. Lucy Ackert & William Hunter, 2001. "An Empirical Examination of the Price-Dividend Relation with Dividend Management," Journal of Financial Services Research, Springer;Western Finance Association, vol. 19(2), pages 115-129, April.
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    Citations

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    Cited by:

    1. Lucy Ackert & William Hunter, 2001. "An Empirical Examination of the Price-Dividend Relation with Dividend Management," Journal of Financial Services Research, Springer;Western Finance Association, vol. 19(2), pages 115-129, April.
    2. Madsen, Jakob B. & Milas, Costas, 2005. "The price-dividend relationship in inflationary and deflationary regimes," Finance Research Letters, Elsevier, vol. 2(4), pages 260-269, December.
    3. Taipalus, Katja, 2012. "Detecting asset price bubbles with time-series methods," Scientific Monographs, Bank of Finland, number 2012_047.
    4. Pierre Giot & Mikael Petitjean, 2009. "Short-term market timing using the bond-equity yield ratio," The European Journal of Finance, Taylor & Francis Journals, vol. 15(4), pages 365-384.
    5. Black, Angela & Fraser, Patricia & Groenewold, Nicolaas, 2003. "How big is the speculative component in Australian share prices?," Journal of Economics and Business, Elsevier, vol. 55(2), pages 177-195.
    6. Fredj Jawadi, 2009. "Essay in dividend modelling and forecasting: does nonlinearity help?," Applied Financial Economics, Taylor & Francis Journals, vol. 19(16), pages 1329-1343.
    7. Ramzi Boussaidi & Abaoub Ezzeddine, 2016. "The dynamics of Stock price adjustment to fundamentals: an empirical essay via STAR models in the Tunisian stock market," Economics Bulletin, AccessEcon, vol. 36(2), pages 813-826.
    8. Giot, Pierre & Petitjean, Mikael, 2007. "The information content of the Bond-Equity Yield Ratio: Better than a random walk?," International Journal of Forecasting, Elsevier, vol. 23(2), pages 289-305.
    9. Black, Angela & Fraser, Patricia & Groenewold, Nicolaas, 2003. "U.S. stock prices and macroeconomic fundamentals," International Review of Economics & Finance, Elsevier, vol. 12(3), pages 345-367.
    10. Pan, Ming-Shiun, 2007. "Permanent and transitory components of earnings, dividends, and stock prices," The Quarterly Review of Economics and Finance, Elsevier, vol. 47(4), pages 535-549, September.
    11. Angela Black & Patricia Fraser & Martin Hoesli, 2006. "House Prices, Fundamentals and Bubbles," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(9‐10), pages 1535-1555, November.
    12. Coakley, Jerry & Fuertes, Ana-Maria, 2006. "Valuation ratios and price deviations from fundamentals," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2325-2346, August.
    13. Patricia Fraser & Martin Hoesli & Lynn McAlevey, 2008. "House Prices and Bubbles in New Zealand," The Journal of Real Estate Finance and Economics, Springer, vol. 37(1), pages 71-91, July.
    14. Taipalus, Katja, 2006. "Bubbles in the Finnish and US equities markets," Scientific Monographs, Bank of Finland, number 35/2006.

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    More about this item

    Keywords

    Stock - Prices;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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