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

Posted: 20 Apr 1998

See all articles by R. Glen Donaldson

R. Glen Donaldson

University of British Columbia (UBC) - Sauder School of Business

Mark J. Kamstra

York University - Schulich School of Business

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

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: https://ssrn.com/abstract=7688

R. Glen Donaldson (Contact Author)

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Department of Finance
Vancouver BC V6T 1Z2
Canada
604-822-8344 (Phone)
604-822-8521 (Fax)

Mark J. Kamstra

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

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