Scandinavian Working Papers in Economics
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Department of Economics, Copenhagen Business School Working Paper Series, Department of Economics, Copenhagen Business School

No 12-2000:

Steen Nielsen and Jan Overgaard Olesen

Abstract: Using annual data over the post-World War I-period, we estimate a fundamentals-based

empirical model for the dividend-price ratio of Danish stocks. The key fundamentals-variable

is a time-varying discount rate, decomposed into time-varying measures for the growth-adjusted

real interest rate and the risk premium on stocks. In addition, the model includes

real dividends and the lagged dividend-price ratio as explanatory variables. Results show

that the model suffers from structural breaks over the sample. Using a two-state regime-switching

approach to capture non-modeled shifts in the economic environment, we find that

all fundamentals are highly significant in at least one regime and, moreover, obtain a good

fit. The model identifies two very persistent regimes characterized by a ‘low’, respectively,

‘high’ dividend-price ratio.

Keywords: Dividend-price ration; Stocks; Denmark; (follow links to similar papers)

JEL-Codes: G19; (follow links to similar papers)

39 pages, July 12, 2001

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