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Cointegration Tests under Multiple Regime Shifts: An Application to the Stock Price-Dividend Relationship

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  • Vasco Gabriel

    (University of Surrey and NIPE-UM, Portugal)

  • Luis Martins

    (UNIDE, ISCTE-LUI, Portugal)

Abstract

We examine the properties of several residual-based cointegration tests when long run parameters are subject to multiple shifts driven by an unobservable Markov process. Unlike earlier work, which considered one-off deterministic breaks, our approach has the advantage of allowing for an unspeci?ed number of stochastic breaks. We illustrate this issue by exploring the possibility of Markov switching cointegration in the stock-price dividend relationship and showing that this case is empirically relevant. Our subsequent Monte Carlo analysis reveals that standard cointegration tests are generally reliable, their performance often being robust for a number of plausible regime shift parameterizations.

Suggested Citation

  • Vasco Gabriel & Luis Martins, 2010. "Cointegration Tests under Multiple Regime Shifts: An Application to the Stock Price-Dividend Relationship," School of Economics Discussion Papers 0910, School of Economics, University of Surrey.
  • Handle: RePEc:sur:surrec:0910
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    More about this item

    Keywords

    Present value model; Cointegration tests; Markov switching;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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