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Periodically Collapsing Bubbles in Stock Prices Cointegrated with Broad Dividends and Macroeconomic Factors
Florida International University, USA
Department of Economics, University Park DM 320A, Florida International University, Miami, FL 33199, USA
* Author to whom correspondence should be addressed.
Received: ; in revised form: / Accepted: / Published: 31 December 2011
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
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MDPI and ACS Style
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.
Fu M, Bidarkota PV. Periodically Collapsing Bubbles in Stock Prices Cointegrated with Broad Dividends and Macroeconomic Factors. Journal of Risk and Financial Management. 2011; 4(1):97-132.
Fu, Man; Bidarkota, Prasad V. 2011. "Periodically Collapsing Bubbles in Stock Prices Cointegrated with Broad Dividends and Macroeconomic Factors." J. Risk Financial Manag. 4, no. 1: 97-132.