Journal of Economic Theory and Econometrics: Journal of the Korean Econometric Society
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Journal of Economic Theory and Econometrics
JETEM/계량경제학보/計量經濟學報/JKES
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 , 1–15



  •   (Korea Finance Corporation)

  •   (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.


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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