A New Dividend Forecasting Procedure that Rejects Bubbles in Asset Prices: The Case of 1929’s Stock Crash

Ronnie Donaldson; Mark J. Kamstra

doi:10.1093/rfs/9.2.333

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A New Dividend Forecasting Procedure that Rejects Bubbles in Asset Prices: The Case of 1929’s Stock Crash

Ronnie Donaldson¹; Mark J. Kamstra²

¹ British Academy · ² Simon Fraser University

Review of Financial Studies 1996

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-Artificial Neural Network 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.

DOI: 10.1093/rfs/9.2.333
Volume: 9 (2)
Pages: 333-383
Language: en
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