Intrinsic bubbles revisited: evidence from nonlinear cointegration and forecasting

Intrinsic bubbles revisited: evidence from nonlinear cointegration and forecasting

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Article ID: iaor2008304
Country: United Kingdom
Volume: 23
Issue: 4
Start Page Number: 237
End Page Number: 250
Publication Date: Jul 2004
Journal: International Journal of Forecasting
Authors: ,
Keywords: forecasting: applications
Abstract:

This paper offers strong further empirical evidence to support the intrinsic bubble model of stock prices, developed by Froot and Obstfeld, 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.

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