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

Author

Listed:
  • 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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    File URL: http://openarchive.cbs.dk/cbsweb/handle/10398/7556
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    References listed on IDEAS

    as
    1. Driffill, John & Sola, Martin, 1998. "Intrinsic bubbles and regime-switching," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 357-373, July.
    2. John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 195-228.
    3. John Y. Campbell & Robert J. Shiller, 2001. "Valuation Ratios and the Long-Run Stock Market Outlook: An Update," NBER Working Papers 8221, National Bureau of Economic Research, Inc.
    4. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-856, July.
    5. Engel, Charles & Hamilton, James D, 1990. "Long Swings in the Dollar: Are They in the Data and Do Markets Know It?," American Economic Review, American Economic Association, vol. 80(4), pages 689-713, September.
    6. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, vol. 22(1), pages 3-25, October.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Dividend-price ration; Stocks; Denmark;

    JEL classification:

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

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