Abstract
Recent stock price movements have led to a re-examination of the present value model. Typically, empirical studies have employed a long span of US stock market index data, and have attributed a failure to detect cointegration to the presence of bubbles. This study considers UK firm-level data, and implements panel unit root and cointegration tests. Recent panel tests that allow for cross-sectional dependence control for factors such as bubbles that may result in temporary deviations from the long-run price–dividend relationship. The panel test results largely support the present value model, yielding evidence of cointegration between real prices and dividends.
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