AN IMPULSE RESPONSE FUNCTIONS AND VARIANCE DECOMPOSITIONS ANALYSIS OF INTERNATIONAL EQUITIES

We investigate the components of equity returns across three major national stock markets using explanatory variables, dividend-price ratios and dividend growth rates. The analysis employs the structural Vector Autoregressive Approach (SVAR) to a data set for the period of January 1955 to December 1999. In general, we conclude that dynamic stock return behavior is accounted for primarily by innovations in dividend-price ratios. In all markets stock returns are characterized by the same temporary mean reverting components. These findings, however, cannot be viewed as evidence against market efficiency. We consider the "information" hypothesis of dividends to justify the temporary mean reverting components of stock returns.