Abstract
This paper examines the dynamics of stock prices adjustment to fundamental value proxied by dividend per share and earnings per share in the Tunisian stock market based on the cointegration techniques. First, the linear cointegration between stock prices and fundamental values is examined by using the Johansen's cointegration test. The empirical results indicate a linear cointegrating relationship between stock prices and dividend per share, and not between stock prices and earnings per share, in support of a linear mean reversion of stock prices towards its fundamental value proxied by dividend. To further investigate the cointegration between stock prices and earnings per share in a nonlinear context, we modelled the deviation of stock prices away from EPS by a logistic smooth transition autoregressive (LSTAR) model. Our results indicate that this model cannot capture the nonlinearity of this deviation, failing, then, to give evidence of a nonlinear cointegration between stock prices and EPS. These results suggest that when selecting stocks, Tunisian investors should focus on the underlying performance of stocks only in terms of their dividend per share.