Another look to the Price-Dividend ratio: the Markov-switching approach

Since themispricing e¤ect from a rational valuation model has to be station-ary and insigni\u85cant; the price-dividend ratio in the present value model must be mean-reverting; however, relevant market episodes in the last part of the past century seem to have shown non-conclusive evidence about this fact. In this paper, we analyze the stationarity of this ratio in the context of a Markov-switching model à la Hamilton. This particular speci\u85cation robustly supports the asymmetrical mean-reversion hypothesis of the ratio and identify two im-portant episodes: the post World War II and the 90s "boom". A model with 3 states reports the best state identi\u85cation and reveals that only the \u85rst part of the 90s "boom " (1985-1995) and the post war period are near-nonstationary states, but the las part of the 90´s "boom " is entirely characterized by a new stationary state