Noncausality and Asset Pricing

Lof, Matthijs (2011): Noncausality and Asset Pricing.

Abstract

Misspecification of agents' information sets or expectation formation mechanisms maylead to noncausal autoregressive representations of asset prices. Annual US stock prices are found to be noncausal, implying that agents' expectations are not revealed to an outside observer such as an econometrician observing only realized market data. A simulation study shows that noncausal processes can be generated by asset-pricing models featuring heterogeneous expectations.

• Item Type: MPRA Paper
• Language: English
• Keywords: noncausal autoregressions, stock prices, heterogeneous expectations
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D84 - Expectations ; Speculations; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C59 - Other

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