This paper suggests there may be an I(1) stochastic bubble trend in stock prices, even if, as well documented by previous empirical research, I(1) stock prices and dividends are cointegrated. For this, the paper demonstrates that the long-run equilibrium stock price may be decomposed into fundamental and stochastic bubble trends (i.e., the sum of dividend innovations and that of innovations that are orthogonal to dividend innovations, respectively) by using the Beveridge-Nelson decomposition and projections. In this VAR construction, there is an error correction mechanism through which stock prices converge to their long-run equilibrium, which reflects the stated stochastic bubble trend. The results of the analysis of monthly data from the U.S. (1871.1-2010.9) indicate that fluctuations in stock prices during that period can be explained mainly by the stochastic bubble trend, not by the stochastic trend in dividend shocks, providing support for findings of previous research.
JEL Classification: C32.
Key words and phrases: Stock Price; Stochastic Bubble Trend; Error Correction Model; Beveridge-Nelson Decomposition; Projection
학회소식
공지사항
[2011년 제 4차] Inference for stochastic bubble trend in stock pric
작성자 : 관리자
조회수 : 1014
게시일 :
2011-12-07