Time-series properties of the dividend–price ratio with social dynamics

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Abstract:

We model an exchange economy where a finite number of standard identical agents interact locally and analyse the time-series properties of the simulated dividend–price ratio dp t . Our results document that a sufficient degree of social dynamics induces high persistence in dp t which leads to the failure to reject the null of a unit root, as well as the failure to reject the null that dividends and prices are not cointegrated. At the same time, we find that returns are not significantly autocorrelated, thus, being consistent with weak-form market efficiency. Finally, we document that although dp t is highly persistent, econometric tests may still find predictability of future returns by current dividend–price ratios.

Keywords: D80; E37; G12; G17; agent-based models; hidden Markov chain; predictive regressions; return predictability; social dynamics

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036846.2011.607134

Affiliations: Department of Banking and Finance,Innsbruck University, InnsbruckA-6020, Austria

Publication date: February 1, 2013

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