Speed of adjustment to the long-run equilibrium: An application with US Stock Price and Dividend data

Abstract

The speed of adjustment parameters of the long-run relationship between stock prices and dividends are estimated. By using a recent technique called 'persistence profiles', the short-run dynamics of the simple present discount value relationship for the US annual data between 1878 and 1987 is investigated. Estimates of the persistence profiles implied that system-wide shocks to the cointegrating relationship between stock prices and dividends take around 16 years to die out completely. The results obtained in this study can be interpreted with the existence of transaction costs in the financial markets or market inefficiencies.