Another Look to the Price-Dividend Ratio: A Markov-Switching Approach

This paper analyzes the stationarity of this ratio in the context of a Markov-switching model à la Hamilton (1989) where an asymmetric speed of adjustment is introduced. This particular specification robustly supports a nonlinear reversion process and identifies two relevant episodes: the post-war period from the mid-50ٳ to the mid-70ٳ and the so called ܹ0ٳ boomݠperiod. A three-regime Markov-switching model displays the best regime identification and reveals that only the first part of the 90ٳ boom (1985-1995) and the post-war period are near-nonstationary states. Interestingly, the last part of the 90ٳ boom (1996-2000), characterized by a growing price-dividend ratio, is entirely attributed to a regime featuring a highly reverting process.