Ripamonti, Alexandre (2013): Rational Valuation Formula (RVF) and Time Variability in Asset Rates of Return. Published in: R.Cont.Fin , Vol. 61, No. 24 (May 2013): pp. 5563.

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Abstract
The present study examines the longterm relationship between aggregate price and dividend data and the corresponding mechanism for shortterm error correction using the rational valuation formula and timevarying cointegration and based on Muth's (1961) theory of rational expectations and price movements. The study assumes the variability of asset rates of return and tests the null hypotheses of errorcorrection mechanisms for timeconstant cointegration vectors and inequality between fundamental value and share price. The series used were provided by Shiller (2005) and refer to aggregate price and dividend data for the U.S. stock market over the period 1871 to 2010. The data were analyzed using Johansen’s cointegration models with the use of restricted variables resulting from the combination of the variables studied with the Chebyshev time polynomial, as proposed by Bierens and Martins (2010). The results indicate rejection of the null hypothesis of constancy of cointegration vectors as well as the nonrejection of the null hypothesis of inequality between fundamental value and share price. These results are consistent with those obtained by Bierens and Martins (2010) and do not corroborate Muth's (1961) theory of rational expectations. It is therefore concluded that investors have different expectations of return for different future periods. The results suggest the validation of the model used and that there is a possibility of the occurrence of speculative movements supported by rationality or rational speculative bubbles.
Item Type:  MPRA Paper 

Original Title:  Rational Valuation Formula (RVF) and Time Variability in Asset Rates of Return 
Language:  English 
Keywords:  Rational expectations. Cointegration. Chebyshev. RVF. TV VECM 
Subjects:  G  Financial Economics > G1  General Financial Markets > G12  Asset Pricing ; Trading Volume ; Bond Interest Rates 
Item ID:  79460 
Depositing User:  Alexandre Ripamonti 
Date Deposited:  22 Nov 2019 08:24 
Last Modified:  22 Nov 2019 08:24 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/79460 