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J. Risk Financial Manag. 2011, 4(1), 97-132; doi:10.3390/jrfm4010097
Article

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

1
 and 2,*
1 Florida International University, USA 2 Department of Economics, University Park DM 320A, Florida International University, Miami, FL 33199, USA
* Author to whom correspondence should be addressed.
Published: 31 December 2011
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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 stock prices; broad dividends; macro factors; cointegration; periodically collapsing bubbles
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

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Fu, M.; Bidarkota, P.V. Periodically Collapsing Bubbles in Stock Prices Cointegrated with Broad Dividends and Macroeconomic Factors. J. Risk Financial Manag. 2011, 4, 97-132.

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