Empirical assessment of present value relations

A note on the power of least squares tests for a unit root

“…The purpose of this note is to point out that these versions are inconsistent if the series is stationary around a time trend. an alternative that often [e.g., Kleidon (1986) and Mattey and Meese (1986)] is the relevant one. Indeed, the asymptotic distribution of the test statistics is more concentrated around zero under this alternative than under the null.…”

“…Despite the development of some relatively general and powerful procedures [e.g., Bhargava (1986) and Phillips and Perron (1986)], much research uses the simple ordinary least squares tests suggested in the pioneering research of Fuller (1976) and Dickey and Fuller (1979). Some applications use versions of these tests that do not include a time trend as a regressor [e.g., Kleidon (1986) and Mattey and Meese (1986)]. The purpose of this note is to point out that these versions are inconsistent if the series is stationary around a time trend.…”

An Empirical Examination of the Price-Dividend Relation with Dividend Management

“…Marsh and Merton do not empirically examine whether dividend smoothing can explain the time path of stock prices. See also Mattey and Meese (1986) who examine the affect of dividend smoothing on tests of present value relations.…”

“…Some dispute the validity of the tests and their assumptions (e.g., Flavin, 1983;Kleidon, 1986a;Marsh and Merton, 1986;Mattey and Meese, 1986). For 6 example, Fama (1991) argues that because variance-bound tests assume constant expected returns, they provide no information concerning market efficiency.…”

Was there a bubble in the 1929 Stock Market?

“…Diba and Grossman (1988) argue that, if a rational bubble is present, then successive differences of stock prices will be non-stationary, because the bubble component has a larger than unit root. Mattey and Meese (1986) examine the power of this test for a bubble process of the kind described by Blanchard and Watson (1982), and find it to be high. Similarly, Campbell and Shiller (1987) have shown that, when dividends have one unit root, and prices and dividends are linked by a present-value relation in the absence of bubbles, then prices and dividends will be cointegrated (and prices will have a single unit root).…”