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Title Modeling the Dynamics between Stock Price and Dividend: An Endogenous Regime Switching Approach
Author Heejoon Han (Sungkyunkwan University) and Na Kyeong Lee (Sungkyunkwan University)
Volume 34 Number 2
Pages 213-235 
Keywords Endogenous Regime Switching, Time-Varying Coefficient Cointegration, Error Correction Model, Stock Price, Dividend
Abstract This study considers a new error correction model (ECM) for stock price and dividend,
which accommodates nonlinearities in both long- and short-run relationships. First, timevarying
coefficient cointegration is adopted to explain the nonlinear long-run relationship
between stock price and dividend. Second, the model allows for endogenous regime
switching to describe the short-run relationship. The empirical application on the S&P 500
Index and dividend shows that our model fits the data significantly better than existing
models and provides estimates with meaningful interpretations. In addition, the linear
cointegration is unsuitable to describe the long-run relationship, and the ECM with
endogenous regime switching better explains the data than that with conventional Markov
switching. An extract latent factor specifically reveals the periods for each regime, and the
periods of high-volatility regime include the NBER recession periods and certain periods of
financial crisis.
File KER-20180701-34-2-05.pdf
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