Cointegration and Tests of Present Value Models / John Y. Campbell, Robert J. Shiller.

Format:

Book

Author/Creator:

Campbell, John Y.

Contributor:

National Bureau of Economic Research.

Shiller, Robert J.

Series:

Working Paper Series (National Bureau of Economic Research) no. w1885.

NBER working paper series no. w1885

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1986.

Summary:

In a model where a variable Y[sub t] is proportional to the present value, with constant discount rate, of expected future values of a variable y[sub t] the "spread" S[sub t]= Y[sub t] - [theta sub t] will be stationary for some [theta] whether or not y[sub t]must be differenced to induce stationarity. Thus, Y[sub t] and y[sub t] are cointegrated. The model implies that S[sub t] is proportional to the optimal forecast of [delta Y{sub t+1}] and also to the optimal forecast of S*[sub t], the present value of future [delta y{sub t}]. We use vector autoregressive methods, and recent literature on cointegrated processes, to test the model. When Y[sub t] is the long-term interest rate and y[sub t] the short-term interest rate, we find in postwar U.S. data that S[sub t] behaves much like an optimal forecast of S*[sub t] even though as earlier research has shown it is negatively correlated with [delta Y{sub t+1}]. When Y[sub t] is a real stock price index and y[sub t] the corresponding real dividend, using annual U.S. data for 1871-1986 we obtain less encouraging results for the model, al-though the results are sensitive to the assumed discount rate.

Notes:

Print version record

April 1986.