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

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Florida International University, USA
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Department of Economics, University Park DM 320A, Florida International University, Miami, FL 33199, USA
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Author to whom correspondence should be addressed.
J. Risk Financial Manag. 2011, 4(1), 97-132; https://doi.org/10.3390/jrfm4010097
Published: 31 December 2011
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. View Full-Text
Keywords: stock prices; broad dividends; macro factors; cointegration; periodically collapsing bubbles stock prices; broad dividends; macro factors; cointegration; periodically collapsing bubbles
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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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