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Periodically Collapsing Bubbles in Stock Prices Cointegrated with Broad Dividends and Macroeconomic Factors

Author(s): Man Fu | Prasad V. Bidarkota

Journal: Journal of Risk and Financial Management
ISSN 1911-8066

Volume: 4;
Issue: 1;
Start page: 97;
Date: 2011;
Original page

Keywords: stock prices | broad dividends | macro factors | cointegration | periodically collapsing bubbles

We study fluctuations in stock prices using a framework derived from the present value model augmented with a macroeconomic factor. The fundamental value is derived as the expected present discounted value of broad dividends that include, in addition to traditional cash dividends, other payouts to shareholders. A stochastic discount factor motivated by the consumption-based asset pricing model is utilized. A single macroeconomic factor, namely the output gap determines the non-fundamental component of stock prices. A resulting trivariate Vector Autoregression (TVAR) model of stock prices, broad dividends, and the output gap shows evidence of cointegration in the DJIA and S&P 500 index data. Nonetheless, a sup augmented Dickey-Fuller test reveals existence of periodically collapsing bubbles in S&P 500 data during the late 1990s.
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