Canciones infantiles

We conduct a final test based on the Froot and Obstfeld (1991) intrinsic bubbles model.

Their model assumes that stock prices depend exclusively on dividends. The first step in developing this model is the determination of fundamental prices. We calculate the implied fundamental values based on stochastic version of Gordon’s (1962) model of stock prices,

which is essentially Equation (20). Recall that

^κ

⁼

(

^{er −eμ+σ2/2}

)

⁻¹. The geometric average return of the Straits Times Datastream calculated index

( )

^r is estimated to be 3.15 per cent per month. The estimate of the parameters in Equation (19) are

μ

=0.0051and

σ = 0 . 1068

.

Therefore, for the full sample period. This means

that the fundamental monthly values of the index is 48.42 times dividends. The results are different from Froot and Obstfeld (1991) and also Ma and Kanas (2004) and thus cannot be used as a benchmark as not only is the country of analysis different but also the frequency in their case is yearly whereas we use monthly data.

(

^{1.0314− 0.0051 0.10682/2}

)

^{1 =48.42}

= e ^{+ −}

κ

The intrinsic bubble model of Equation (25) defines that the price-dividend ratio is non-linearly related to dividends. We test this relationship by regressing the price-dividend ratio onto dividends. As in Equation (25), we constrain the value of

λ

based on

. The calculated value of

0

2

2

/

2

σ + λμ −

r

=

λ λ

is 1.93. The results are shown below in

Table 9. We impose no restrictions on the constant.

Table 9. Estimates of Equation (25), _{t t}

Panel A: Full sample period (January 1975-December 2006 OLS 49.31**

(2.62)

-1.61**

(0.51)

9.97** 0.052 0.127 384 Notes: Standard errors are reported in parentheses; OLS regressions report Newey-West standard errors allowing for serial correlation and conditional heteroscedasticity.

*Statistically significant at the 5-per cent level; **Statistically significant at the 1-per cent level

The OLS results indicate that intrinsic bubbles were present during the whole sample period as the coefficient of the regressor is significant. The constant is also significant and close to our calculated κ value. However, the sign of the co-efficient sign is negative and is significantly different from zero. This means that price-dividend ratio under reacts to information on dividends. Therefore, a preliminary conclusion would be that the behaviour of aggregate prices on the Singaporean stock market as represented by the Straits Times Datastream calculated index is different from that was found by Froot and Obstfeld’s intrinsic bubbles model. We also found the Malaysian stock market to be exhibiting results similar to those of Singapore.

The fact that the co-efficient is negatively significant and thus indicates under reaction towards dividends is hardly surprising in what was an emerging market such as Singapore.

Neoh (1989) has presented anecdotal evidence that Singaporean investors were more concerned about capital gains than dividend yield. Singapore does not impose any tax on capital gains unlike in the US. As such, in Singapore, capital gains play a much more important role as compared to dividends payouts. This suits investors who are in the higher income bracket. In addition, the dividend yield of companies listed on the Singapore Stock Exchange is nowhere near that paid out by companies listed in the US.

Nevertheless, the under reaction towards dividends may in future dissipate as Singaporean listed firms have in post-Asian crisis period significantly increased their dividend payout. The market as a whole has been responding to international market norms with greater investment by foreign investors setting the expectations on dividend payouts. For example, Singapore Airlines (SIA) has increased gross dividend payments from 15 cents in Financial Year (FY) 2002-2003 to 100 cents a share for FY2006-2007. This represents a 567% increase. DBS Group recorded a 153% increase in dividends between FY2002 and FY2006. Lastly, United Overseas Bank Limited (UOB) increased its paid out dividend by 71.8% for the same said period. These generous dividend payouts leads us to believe that the Singaporean stock market will follow the market behaviour of developed countries. Therefore, the possibility of

investors overreacting to dividends in the future mimicking the behaviour of investors in the U.S. cannot be ruled out.

Another explanation for the under reaction of Singaporean investors to news about dividends come from a behavioural perspective. Barber and Odean (2001) and Odean (1998) had argued that investors believe too much in their ability to interpret anecdotal evidence and ambiguous information so they will often be slow to acknowledge and process statistical and relevant information (such as corporate earnings or dividends) and the information from others (such as rational informed investors who are also known as smart money investors). As a result, overconfident investors will under react to information like dividends, which is consistent with buying (selling) past winners (losers). This phenomenon could be plaguing the Singapore stock market.

6. Conclusion

All four tests show evidence of stock market bubbles during the sample period analysed.

This indicates that Singapore is not free from bubble-like tendencies that have plagued the stock market. Nevertheless, from a graphical relationship between fundamental prices whichever way you define it and actual prices, the Straits Times Datastream calculated index did in fact converge to its fundamental values after each stock market crash be it the crash of 1981, 1987, 1990, 1997 and the year 2000. A comparison of fundamental prices and actual values also reveals the prolonged stock market bubble of the early 1990s right up to the 1997 Asian financial crisis. All other observed deviations between actual prices and fundamental prices pales in comparison in terms of length with this bubble.

The best of the four tests seems to be the variance bounds tests as it gives a direct comparison between actual prices and ex post prices. By using Mankiw et al. (1985) to augment Shiller’s initial analysis, a concrete case can be made for the existence of bubbles most of the concerns on Shiller’s breakthrough work have been circumvented. The duration dependence test in its original form (using abnormal returns) fails to detect the presence of

rational speculative bubbles and this is in line with the results obtained by Chan et al. (1998) justifying the concerns of Evans (1991) of the presence of periodically collapsing bubbles making it difficult to detect them. The intrinsic bubbles model provided results contrary to the belief about investors’ reaction towards dividend news with the results showing under-reaction rather than over-under-reaction in the U.S. stock market. This seems to be the underlying phenomenon in emerging markets as generally similar results were found for Malaysia as well.

Were the excesses of this stock market bubble the cause of meltdown during the 1997 Asian financial crisis? The question is left for future researchers to answer. The challenges facing the Monetary Authority of Singapore are numerous. Given the increased cross-listing and stock market integration in Asia and the ease with which funds flow across borders, it is imperative the constant monitoring of tell-tales signs of “overheating” of the stock market be done to ensure the stock market is not a catalyst for economic downturn leading to economic depression.

Lastly, what is the role of the monetary authorities in controlling the ill effects of bubbles?

Although we will not get into the ongoing debate on whether central banks should prick a bubble in order to deflate it, much can be done to ensure adequate information is provided for the investor to make a well informed decision on his/her investment. Therefore, information dissemination should be transparent and although there is always temptation to project the economy and the stock market in a good light, we are of the opinion that sometimes, bad news is also unavoidable to jolt the markets back into a sober mood.

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