A New Dividend Forecasting Procedure that Rejects Bubbles in Asset Prices: The Case of the 1929's Stock Crash
R. Glen Donaldson
University of British Columbia - Sauder School of Business
Mark J. Kamstra
York University - Schulich School of Business
REVIEW OF FINANCIAL STUDIES, Vol. 9 No. 2
Abstract:
We develop a new procedure to forecast future cash flows from a financial asset and then use the present value of our cash-flow forecasts to calculate the asset's fundamental price. As an example, we construct a nonlinear ARMA-ARCH-ANN model to obtain out-of-sample dividend forecasts for 1920 and beyond, using only in-sample dividend data. The present value of our forecasted dividends yield fundamental prices that reproduce the magnitude, timing and time-series behavior of the boom and crash in 1929 stock prices. We therefore reject the popular claim that the 1920s stock market contained a bubble.
JEL Classification: G12, G14
Accepted Paper Series
Suggested Citation
Donaldson, R. Glen and Kamstra, Mark J., A New Dividend Forecasting Procedure that Rejects Bubbles in Asset Prices: The Case of the 1929's Stock Crash. REVIEW OF FINANCIAL STUDIES, Vol. 9 No. 2. Available at SSRN: http://ssrn.com/abstract=7688
