An alternative view of the US price-dividend ratio dynamics

•We study the stationarity of the PD ratio in a Markov-switching model.•A three-regime model displays the best regime identification.•We identify an asymmetric speed of adjustment toward a unique attractor.•The estimated attractor is much higher than the historical mean of the PD ratio.•The 1990s boom of the PD ratio is associated with high reversion to the attractor.

The price-dividend (PD) ratio must be stationary for the present value model to be valid. However, several market episodes show stock prices drifting apart from dividends. This paper investigates PD ratio stationarity by considering a Markov-switching model featuring an asymmetric adjustment speed toward a unique attractor. A three-regime model displays the best regime identification. Within this specification, the post-war period is mainly characterized by a stationary state featuring slow reversion to a high attractor, the growing PD ratio period of 1996-2000 features a high-reversion stationary regime, and the subprime crisis episode is classified into a temporary nonstationary regime.