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Journal of Economic Theory and Econometrics
Journal of the Korean Econometric Society
State-Space Model and Present Value Model: An Application to the Korean Stock Market
Vol.24, No.1, March 2013, 1–15
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Kwang Hun Choi
(Korea Finance Corporation)
Cheolbeom Park
(Korea University)
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Abstract
We have applied the state-space model to the Korean stock market under restrictions imposed by the present-value relation. Our main findings are (i) expected stock returns vary over time and have persistent and predictable component, (ii) expected dividend growth rates do not contain persistent and predictable component, (iii) expected stock returns play relatively more important role in explaining variations in the price-dividend ratio, (iv) shocks to expected stock returns are also more crucial in understanding unexpected stock return shocks, and (v) the state-space model does not appear to perform better than the predictive regression in terms of the ability in forecasting stock returns or dividend growth rates.
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Keywords
expected stock returns, expected dividend growth rates, price-dividend ratio, present-value model, state-space model |
JEL classification codes
G12, C12, C32 |
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