Modeling The Dividend-Price Ratio: The Role Of Fundamentals Using A Regime-Switching Approach
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.
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| Length: | 39 pages |
| Date of creation: | 12 Jul 2001 |
| Date of revision: | |
| Handle: | RePEc:hhs:cbsnow:2000_012 |
| Contact details of provider: | Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark Phone: 38 15 25 75 Fax: 38 15 34 99 Web page: http://www.cbs.dk/departments/econ/ Email: More information through EDIRC
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References listed on IDEAS
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- John Y. Campbell, Robert J. Shiller, 1988.
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- Donald W.K. Andrews, 1990.
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Cowles Foundation Discussion Papers
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- John Y. Campbell & Robert J. Shiller, 2001.
"Valuation Ratios and the Long-run Stock Market Outlook: An Update,"
Cowles Foundation Discussion Papers
1295, Cowles Foundation for Research in Economics, Yale University.
- 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.
- Driffill, John & Sola, Martin, 1998. "Intrinsic bubbles and regime-switching," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 357-373, July.
- 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.
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