WP 2014-06 Random Walks in Dividend Yields and Bubbles

Posted On February 26, 2014
Categories Working Papers, WP 2014
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ABSTRACT. A nonstationary dividend yield, having a unit root, is seen as proof of bubbles (Craine 1993). This inference is not valid. A sucient condition for the absence, respectively presence of bubbles is the uniform divergence, respectively uniform convergence of the dividend yield series. I use this criterion to show that a random walk dividend yield must be bubble-free if a positive deterministic trend or a large positive drift is present. I also construct an example where the equilibrium dividend yield is a random walk without a deterministic trend or drift, but bubbles are still absent.