Skip to main content
×
Home
    • Aa
    • Aa
  • Get access
    Check if you have access via personal or institutional login
  • Cited by 14
  • Cited by
    This article has been cited by the following publications. This list is generated based on data provided by CrossRef.

    Abeysinghe, Tilak and Gu, Jiaying 2016. Estimating fundamental and affordable housing price trends: a study based on Singapore. Applied Economics, p. 1.


    Cenedese, Gino and Mallucci, Enrico 2016. What moves international stock and bond markets?. Journal of International Money and Finance, Vol. 60, p. 94.


    Engsted, Tom 2016. FAMA ON BUBBLES. Journal of Economic Surveys, Vol. 30, Issue. 2, p. 370.


    Engsted, Tom Hviid, Simon J. and Pedersen, Thomas Q. 2016. Explosive bubbles in house prices? Evidence from the OECD countries. Journal of International Financial Markets, Institutions and Money, Vol. 40, p. 14.


    Polimenis, Vassilis and Neokosmidis, Ioannis M. 2016. The modified dividend–price ratio. International Review of Financial Analysis, Vol. 45, p. 31.


    Bollerslev, Tim Xu, Lai and Zhou, Hao 2015. Stock return and cash flow predictability: The role of volatility risk. Journal of Econometrics, Vol. 187, Issue. 2, p. 458.


    Calvet, Laurent E. and Czellar, Veronika 2015. Through the looking glass: Indirect inference via simple equilibria. Journal of Econometrics, Vol. 185, Issue. 2, p. 343.


    Caspi, Itamar 2015. Testing for a housing bubble at the national and regional level: the case of Israel. Empirical Economics,


    Engsted, Tom and Pedersen, Thomas Q. 2015. Predicting returns and rent growth in the housing market using the rent-price ratio: Evidence from the OECD countries. Journal of International Money and Finance, Vol. 53, p. 257.


    Lof, Matthijs 2015. Rational Speculators, Contrarians, and Excess Volatility. Management Science, Vol. 61, Issue. 8, p. 1889.


    Pavlidis, Efthymios Yusupova, Alisa Paya, Ivan Peel, David Martínez-García, Enrique Mack, Adrienne and Grossman, Valerie 2015. Episodes of Exuberance in Housing Markets: In Search of the Smoking Gun. The Journal of Real Estate Finance and Economics,


    Engsted, Tom and Pedersen, Thomas Q. 2014. Housing market volatility in the OECD area: Evidence from VAR based return decompositions. Journal of Macroeconomics, Vol. 42, p. 91.


    Gelain, Paolo and Lansing, Kevin J. 2014. House prices, expectations, and time-varying fundamentals. Journal of Empirical Finance, Vol. 29, p. 3.


    McMillan, David G. 2014. Modelling Time-Variation in the Stock Return-Dividend Yield Predictive Equation. Financial Markets, Institutions & Instruments, Vol. 23, Issue. 5, p. 273.


    ×
  • Journal of Financial and Quantitative Analysis, Volume 47, Issue 3
  • June 2012, pp. 643-665

The Log-Linear Return Approximation, Bubbles, and Predictability

  • Tom Engsted (a1), Thomas Q. Pedersen (a2) and Carsten Tanggaard (a3)
  • DOI: http://dx.doi.org/10.1017/S0022109012000191
  • Published online: 13 February 2012
Abstract
Abstract

We study in detail the log-linear return approximation introduced by Campbell and Shiller (1988a). First, we derive an upper bound for the mean approximation error, given stationarity of the log dividend-price ratio. Next, we simulate various rational bubbles that have explosive conditional expectation, and we investigate the magnitude of the approximation error in those cases. We find that, surprisingly, the Campbell-Shiller approximation is very accurate even in the presence of large explosive bubbles. Only in very large samples do we find evidence that bubbles generate large approximation errors. Finally, we show that a bubble model in which expected returns are constant can explain the predictability of stock returns from the dividend-price ratio that many previous studies have documented.

Copyright
Linked references
Hide All

This list contains references from the content that can be linked to their source. For a full set of references and notes please see the PDF or HTML where available.

A. B. Abel ; N. G. Mankiw ; L. H. Summers ; and R. J. Zeckhauser . “Assessing Dynamic Efficiency: Theory and Evidence.” Review of Economic Studies, 56 (1989), 120.

D. Abreu , and M. K. Brunnermeier . “Bubbles and Crashes.” Econometrica, 71 (2003), 173204.

N. S. Balke , and M. E. Wohar . “Market Fundamentals versus Rational Bubbles in Stock Prices: A Bayesian Perspective.” Journal of Applied Econometrics, 24 (2009), 3575.

J. Boudoukh ; R. Michaely ; M. Richardson ; and M. R. Roberts . “On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing.” Journal of Finance, 62 (2007), 877915.

M. K Brunnermeier . “Bubbles.” In The New Palgrave Dictionary of Economics, S. N. Durlauf and L. E. Blume , eds. New York, NY: Palgrave Macmillan (2008).

J. Y Campbell . “Viewpoint: Estimating the Equity Premium.” Canadian Journal of Economics, 41 (2008), 121.

J. Y. Campbell , and R. J. Shiller . “Cointegration and Tests of Present Value Models.” Journal of Political Economy, 95 (1987), 10621088.

J. Y. Campbell , and R. J. Shiller . “The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors.” Review of Financial Studies, 1 (1988a), 195228.

J. Y. Campbell , and R. J. Shiller . “Stock Prices, Earnings, and Expected Dividends.” Journal of Finance, 43 (1988b), 661676.

J. Y. Campbell , and L. M. Viceira . Strategic Asset Allocation: Portfolio Choice for Long-Term Investors. Oxford, UK: Oxford University Press (2002).

J. Y. Campbell , and M. Yogo . “Efficient Tests of Stock Return Predictability.” Journal of Financial Economics, 81 (2006), 2760.

L Chen . “On the Reversal of Return and Dividend Predictability: A Tale of Two Periods.” Journal of Financial Economics, 92 (2009), 128151.

J. H Cochrane . “Explaining the Variance of Price-Dividend Ratios.” Review of Financial Studies, 5 (1992), 243280.

J. H Cochrane . “The Dog That Did Not Bark: A Defense of Return Predictability.” Review of Financial Studies, 21 (2008), 15331575.

B. T. Diba , and H. I. Grossman . “The Theory of Rational Bubbles in Stock Prices.” Economic Journal, 98 (1988a), 746754.

T. Engsted Explosive Bubbles in the Cointegrated VAR Model.” Finance Research Letters, 3 (2006), 154162.

T. Engsted , and B. Nielsen . “Testing for Rational Bubbles in a Coexplosive Vector Autoregression.” Econometrics Journal, forthcoming (2012).

T. Engsted , and T. Q. Pedersen . “The Dividend-Price Ratio Does Predict Dividend Growth: International Evidence.” Journal of Empirical Finance, 17 (2010), 585605.

E. F. Fama , and K. R. French . “Dividend Yields and Expected Stock Returns.” Journal of Financial Economics, 22 (1988), 325.

E. F. Fama , and K. R. French . “Disappearing Dividends: Changing Firm Characteristics or Lower Propensity to Pay?Journal of Financial Economics, 60 (2001), 343.

S. Johansen Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models.” Econometrica, 59 (1991), 15511580.

S. F Leroy . “Rational Exuberance.” Journal of Economic Literature, 42 (2004), 783804.

J. Lewellen Predicting Returns with Financial Ratios.” Journal of Financial Economics, 74 (2004), 209235.

P. C. B. Phillips ; Y. Wu ; and J. Yu . “Explosive Behavior in the 1990s Nasdaq: When Did Exuberance Escalate Asset Values?International Economic Review, 52 (2011), 201226.

D. Robertson , and S. Wright . “Dividends, Total Cash Flow to Shareholders, and Predictive Return Regressions.” Review of Economics and Statistics, 88 (2006), 9199.

M. S. Santos , and M. Woodford . “Rational Asset Pricing Bubbles.” Econometrica, 65 (1997), 1957.

J. Tirole Asset Bubbles and Overlapping Generations.” Econometrica, 53 (1985), 14991528.

K. D West . “A Specification Test for Speculative Bubbles.” Quarterly Journal of Economics, 102 (1987), 553580.

Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
  • URL: /core/journals/journal-of-financial-and-quantitative-analysis
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×