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

34 Pages Posted: 23 Oct 2011

See all articles by Man Fu

Man Fu

affiliation not provided to SSRN

Prasad V. Bidarkota

Florida International University (FIU) - Department of Economics

Date Written: May 26, 2009

Abstract

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.

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

JEL Classification: E44, E47, G12, G17

Suggested Citation

Fu, Man and Bidarkota, Prasad V., Periodically Collapsing Bubbles in Stock Prices Cointegrated with Broad Dividends and Macroeconomic Factors (May 26, 2009). Available at SSRN: https://ssrn.com/abstract=1947704 or http://dx.doi.org/10.2139/ssrn.1947704

Man Fu

affiliation not provided to SSRN ( email )

Prasad V. Bidarkota (Contact Author)

Florida International University (FIU) - Department of Economics ( email )

University Park, DM 320A
Florida International University
Miami, FL 33199
United States
305-348-6362 (Phone)
305-348-1524 (Fax)

HOME PAGE: http://www.fiu.edu/~bidarkot/

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