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Modeling Stock Prices without Knowing How to Induce Stationarity

David N. DeJong and Charles H. Whiteman
Econometric Theory
Vol. 10, No. 3/4, Symposium Double Issue: Bayes Methods and Unit Roots (Aug. - Oct., 1994), pp. 701-719
Stable URL: http://www.jstor.org/stable/3532556
Page Count: 19
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Modeling Stock Prices without Knowing How to Induce Stationarity
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Abstract

Bayesian procedures for evaluating linear restrictions imposed by economic theory on dynamic econometric models are applied to a simple class of present-value models of stock prices. The procedures generate inferences that are not conditional on ancillary assumptions regarding the nature of the nonstationarity that characterizes the data. Inferences are influenced by prior views concerning nonstationarity, but these views are formally incorporated into the analysis, and alternative views are easily adopted. Viewed in light of relatively tight prior distributions that have proved useful in forecasting, the present-value model seems at odds with the data. Researchers less certain of the interaction between dividends and prices would find little reason to look beyond the present-value model.

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