Do Stock Prices Move Too Much to Be Justified by Changes in Cash Flows? New Evidence from Parallel Asset Markets

35 Pages Posted: 2 Oct 2012  

Tobias Muhlhofer

University of Miami - Department of Finance

Andrey Ukhov

Cornell University

Date Written: January 1, 2012

Abstract

We take advantage of two parallel markets for a set of cash flows to show that better cash flow measurement improves the performance of a dividend discount model. Unlike previous literature, we use out-of-sample estimation. We construct a natural laboratory, by using a unique dataset of commercial real estate and augmenting the dividend information for REITs with cash flow information from this parallel market. The results improve dramatically when information from direct property cash flows is added. These findings suggest that the performance of dividend pricing models improves greatly with better measurement of cash flows, and thus contribute to the resolution of the excess volatility puzzle.

Keywords: Dividend Pricing Models, Excess Volatility, Cash Flows, Vector Autoregression, Real Estate Investment Trusts

JEL Classification: G12

Suggested Citation

Muhlhofer, Tobias and Ukhov, Andrey, Do Stock Prices Move Too Much to Be Justified by Changes in Cash Flows? New Evidence from Parallel Asset Markets (January 1, 2012). 29th International Conference of the French Finance Association (AFFI) 2012. Available at SSRN: https://ssrn.com/abstract=2083609 or http://dx.doi.org/10.2139/ssrn.2083609

Tobias Muhlhofer

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

HOME PAGE: http://tobias.muhlhofer.com

Andrey Ukhov (Contact Author)

Cornell University ( email )

Ithaca, NY 14853
United States

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