NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Cointegration and Tests of Present Value Models

John Y. Campbell, Robert J. Shiller

NBER Working Paper No. 1885 (Also Reprint No. r1016)
Issued in April 1986
NBER Program(s):   ME

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.

download in pdf format
   (284 K)

email paper

This paper is available as PDF (284 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w1885

Published: Campbell, John and Robert J. Shiller. "Cointegration and Tests of Present Value Models," Journal of Political Economy, Vol. 95, No. 5, October 1987, pp. 1062-1088.

Users who downloaded this paper also downloaded these:
Campbell and Shiller w2511 Stock Prices, Earnings and Expected Dividends
Shiller w0456 Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?
Blanchard and Watson w0945 Bubbles, Rational Expectations and Financial Markets
Abel and Blanchard w1122 The Present Value of Profits and Cyclical Movements in Investment
Campbell and Shiller w2100 The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us