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Intrinsic bubbles revisited: evidence from nonlinear cointegration and forecasting
Author(s) -
Ma Yue,
Kanas Angelos
Publication year - 2004
Publication title -
journal of forecasting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.543
H-Index - 59
eISSN - 1099-131X
pISSN - 0277-6693
DOI - 10.1002/for.909
Subject(s) - economics , cointegration , dividend , econometrics , stock (firearms) , random walk , empirical evidence , stock market , rational expectations , nonlinear system , financial economics , stock market bubble , mathematics , finance , statistics , physics , mechanical engineering , paleontology , philosophy , epistemology , horse , quantum mechanics , engineering , biology
This paper offers strong further empirical evidence to support the intrinsic bubble model of stock prices, developed by Froot and Obstfeld ( American Economic Review , 1991), in two ways. First, our results suggest that there is a long‐run nonlinear relationship between stock prices and dividends for the US stock market during the period 1871–1996. Second, we find that the out‐of‐sample forecasting performance of the intrinsic bubbles model is significantly better than the performance of two alternatives, namely the random walk and the rational bubbles model. Copyright © 2004 John Wiley & Sons, Ltd.