Are there threshold effects in the stock price-dividend relation? The case of the US stock market, 1871-2004

We use recent developments on threshold autoregressive models that allow deriving endogenously threshold effects to analyse the evolution of the US stock price-dividend relation over the period 1871 to 2004. More specifically, a mean-reverting dynamic behaviour of the stock price-dividend ratio should be expected once such threshold is reached. Our empirical results showed that significant adjustments would occur when, in a particular year, the stock price-dividend ratio had shown a decrease of more than 8.0% between the previous year and the fourth year before, which implies nonlinearities in the dynamic behaviour of the US stock price-dividend relation.