Periodic Integration and Cointegration of U.S. Stock Prices, Dividends, and Interest Rates: A New Test of the Present Value Model

Abstract

This paper presents a new test of the present value model of stock price determination, using some of the recent advances in the econometrics of seasonal time series. Unlike earlier studies which generally find stock prices, dividends, and interest rates to be characterized by standard nonseasonal unit roots, we find evidence of periodic seasonal integration in these variables. This means that the conventional cointegration tests may not be robust. Using a more appropriate periodic cointegration test, our results nevertheless fail to support the present value model, thus reinforcing the case against the efficient market hypothesis.