Fractional Integration of the Price-Dividend Ratio in a Present-Value Model of Stock Prices
Data(s) |
06/08/2015
06/08/2015
12/09/2014
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Resumo |
We re-examine the dynamics of returns and dividend growth within the present-value framework of stock prices. We find that the finite sample order of integration of returns is approximately equal to the order of integration of the first-differenced price-dividend ratio. As such, the traditional return forecasting regressions based on the price-dividend ratio are invalid. Moreover, the nonstationary long memory behaviour of the price-dividend ratio induces antipersistence in returns. This suggests that expected returns should be modelled as an AFIRMA process and we show this improves the forecast ability of the present-value model in-sample and out-of-sample. |
Identificador | |
Idioma(s) |
en |
Publicador |
University of Dundee |
Relação |
SIRE DISCUSSION PAPER;SIRE-DP-2015-79 |
Palavras-Chave | #price-dividend ratio #persistence #fractional integration #return predictability #present-value model |
Tipo |
Other |