STOCK-PRICE EFFECTS OF PERMANENT AND TRANSITORY SHOCKS

This paper exploits the long-run equilibrium relationship between stoc k prices and dividends, implied by the present value model, to structu rally identify a dynamic model that governs the behavior of stock pric es. The innovations to the data are dichotomized into those that leave a permanent imprint on both series and those that have only transitor y effects. Unlike previous studies, however, we do not impose arbitrar y identifying restrictions to decompose the joint process, restriction s that may not be consistent the data. (JEL C12, C32, E24).