Finance and Economics Discussion Series

<p>Recent research indicates that results of variance-bounds tests of stock price volatility may depend on the definition of cash flows deemed relevant to shareholders: Tests using regular (or narrow) dividends repeatedly have suggested that stock prices fluctuate more than can be explained by a simple present value hypothesis while some tests using broad dividends (i.e. narrow dividends plus proceeds from share liquidations) do not detect such excess price volatility. Researchers disagree as to the cause and meaning of these differences. This paper derives and analyzes the broad-dividend version of the present value hypothesis to show that under common assumptions these differences in variance-bounds tests have only two possible causes: Either narrow-dividend tests have rejected the present value hypothesis because of bubbles (either rational bubbles or empirical bubbles as might be effected by dividend-smoothing or dividend-nonpayment); or broad-dividend tests simply have lacked power to detect mispricing. Using simulation and results from previous studies this paper demonstrates that the second possible cause -- the lack of power in broad-dividend tests -- most likely explains the differences between narrow- and broad-dividend variance-bounds tests.</p><p>This work has been selected by scholars as being culturally important and is part of the knowledge base of civilization as we know it. This work was reproduced from the original artifact and remains as true to the original work as possible. Therefore you will see the original copyright references library stamps (as most of these works have been housed in our most important libraries around the world) and other notations in the work.</p><p>This work is in the public domain in the United States of America and possibly other nations. Within the United States you may freely copy and distribute this work as no entity (individual or corporate) has a copyright on the body of the work.</p><p>As a reproduction of a historical artifact this work may contain missing or blurred pages poor pictures errant marks etc. Scholars believe and we concur that this work is important enough to be preserved reproduced and made generally available to the public. We appreciate your support of the preservation process and thank you for being an important part of keeping this knowledge alive and relevant.</p><br>