Empirical evidence on periodically collapsing stock price bubbles

Abstract

According to the dividend discount model (DDM), a long run relationship should exist between stock prices and dividends. In this study, in order to test the validity of the DDM on the French, German, Japanese, UK and US stock markets from 1973 to 2002, cointegration tests corrected for skewness and excess kurtosis are implemented. As dividends distribution may be affected by stock repurchases strategies, the test is adjusted by taking earnings into account. It is found that the speculative bubble hypothesis cannot be rejected.

Notes

¹ Only Japan is in common with Sarno and Taylor (1999), but the period studied here is longer (1973–2002, instead of 1988–1997).

² Since dividends are more taxed, firms may prefer to repurchase their stocks. Repurchases transfer cash to shareholders who sell their stocks and benefit to ongoing shareholders as it shrinks the number of shares. Many analysts argued that record low dividend yields in the late 1990s are better explained by repurchases than by excessive stock prices.

³ These results are robust to the number of lags. Results with 12 lags are displayed in tables 3A and 4A in Appendix.