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

Authored by Jochen Lawrenz

Date Published: 2013

DOI: 10.1080/00036846.2011.607134

Sponsors: No sponsors listed

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Model Documentation: Other Narrative Mathematical description

Model Code URLs: Model code not found

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.

Tags

Agent-based models Social dynamics Hidden Markov Chain Predictive regressions Return predictability