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Modeling The Dividend-Price Ratio: The Role Of Fundamentals Using A Regime-Switching Approach

Author

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  • Nielsen, Steen

    (Department of Economics, Copenhagen Business School)

  • Olesen, Jan Overgaard

    (Department of Economics, Copenhagen Business School)

Abstract

Using annual data over the post-World War I-period, we estimate a fundamentals-based empirical model for the dividend-price ratio of Danish stocks. The key fundamentals-variable is a time-varying discount rate, decomposed into time-varying measures for the growth-adjusted real interest rate and the risk premium on stocks. In addition, the model includes real dividends and the lagged dividend-price ratio as explanatory variables. Results show that the model suffers from structural breaks over the sample. Using a two-state regime-switching approach to capture non-modeled shifts in the economic environment, we find that all fundamentals are highly significant in at least one regime and, moreover, obtain a good fit. The model identifies two very persistent regimes characterized by a ‘low’, respectively, ‘high’ dividend-price ratio.

Suggested Citation

  • Nielsen, Steen & Olesen, Jan Overgaard, 2001. "Modeling The Dividend-Price Ratio: The Role Of Fundamentals Using A Regime-Switching Approach," Working Papers 12-2000, Copenhagen Business School, Department of Economics.
    • Handle: RePEc:hhs:cbsnow:2000_012
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    References listed on IDEAS

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    JEL classification:

    • G19 - Financial Economics - - General Financial Markets - - - Other

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