Lof, Matthijs (2010): Heterogeneity in Stock Pricing: A STAR Model with Multivariate Transition Functions.
Download (386kB) | Preview
Stock prices often diverge from measures of fundamental value, which simple present value models fail to explain. This paper tries to find causes for these long-run price movements and their persistence by estimating a STAR model for the price-earnings ratio of the S&P500 index for 1961Q1 - 2009Q3, with a transition function that depends on a wider set of exogenous or predetermined transition variables. Several economic, monetary and financial variables, as well as linear combinations of these, are found to have nonlinear effects on stock prices. A two-step estimation procedure is proposed to select the transition variables and estimate their weights. This STAR model can be interpreted as a heterogeneous agent asset pricing model that makes a distinction between chartists and fundamentalists, where the set of transition variables is included in the agents’ information set.
|Item Type:||MPRA Paper|
|Original Title:||Heterogeneity in Stock Pricing: A STAR Model with Multivariate Transition Functions|
|Keywords:||Heterogeneous agents, Regime switching, Stock prices, STAR models|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes
|Depositing User:||Matthijs Lof|
|Date Deposited:||02. May 2011 23:51|
|Last Modified:||26. Feb 2013 08:11|
 Aruoba, S.B., F.X. Diebold, F.X. and C. Scotti (2009), Real-Time Measurement of Business Conditions, Journal of Business and Economic Statistics 2), pp. 417-27.
 Becker, R. and D. Osborn (2007), Weighted smooth transition regressions. University of Manchester Economics Discussion Paper Series, 0724.
 Bernanke, B.S. (1990), On the predictive power of interest rates and interest rate spreads, New England Economic Review, Federal Reserve Bank of Boston, issue Nov, 51-68.
 Boswijk, P., C.H. Hommes and S. Manzan (2007), Behavioral Heterogeneity in Stock Prices. Journal of Economic Dynamics and Control 31, 1938-1970.
 Bredin, D. and S. Hyde (2008), Regime change and the role of international markets on the stock returns of small open economies. European Financial Management, 14, 315-346.
 Brock, W.A. and C.H. Hommes (1998), Heterogeneous beliefs and routes to chaos in a simple asset pricing model. Journal of Economic Dynamics and Control 22, 1235-1274.
 Campbell, J.Y. and R.J. Shiller (2001), Valuation ratios and the long-run stock market outlook: an update. NBER working paper 8221.
 Cochrane, J.H. (2001), Asset Pricing. Princeton University Press.
 Eitrheim, Ø. and T. Teräsvirta (1996), Testing the adequacy of smooth transition autoregressive models. Journal of Econometrics 74, 59-76.
 Fama, E.F. and K.R. French (2001), Disappearing dividends: Changing firm characteristics or lower propensity to pay? Journal of Financial Economics 60, 3-43.
 Godfrey, L.G. (1988), Misspecification tests in econometrics. Cambridge University Press.
 Gordon, M., (1962), The Investment Financing and Valuation of the Corporation. Irwin.
 Hakkio, C.S. and W.R. Keeton (2009), Financial Stress: What Is It, How Can It Be Measured, and Why Does It Matter? Federal Reserve Bank of Kansas City Economic Review, Second Quarter 2009, 5-50.
 Hommes, C.H. (2006), Heterogeneous agent models in economics and finance. In: Judd, K.J. and L. Tesfatsion (Eds.), Handbook of Computational Economics, Vol. 2: Agent- Based Computational Economics, North-Holland, pp. 1109-1186
 Kaliva, K. and L. Koskinen (2008), Stock market bubbles, inflation and investment risk. International Review of Financial Analysis, 17, 592-603.
 Luukkonen, R., P. Saikkonen and T. Teräsvirta (1988), Testing linearity against smooth transition autoregressive models. Biometrika 75, 491-499.
 Medeiros, M.C. and A. Veiga (2005), A flexible coefficient smooth transition time series model. IEEE transactions on neural networks 16, 97-113.
 Munk, C. (2010), Financial Asset Pricing Theory. To be published. Oxford University Press.
 Shiller, R.J. (1981), Do stock prices move too much to be justified by subsequent changes in dividends? American Economic Review 71, 421-436.
 Shleifer, A. and R. Vishny (1997), The limits of arbitrage. Journal of finance, 52, 35-55.
 Teräsvirta, T. (1994), Specification, estimation, and evaluation of smooth transition autoregressive models. Journal of the American Statistical Association 89, 208-218.
 Van Dijk, D and P.H. Franses (1999), Modeling multiple regimes in the business cycle. Macroeconomic Dynamics 3, 311–340.
 Van Norden, S. and H. Shaller (1999), Speculative behavior, regime-switching and stock market fundamentals. In: Rothman, P. (Eds.), Nonlinear Time Series Analysis of Economic and Financial Data, Kluwer, Dordrecht, pp. 321-356.
Available Versions of this Item
- Heterogeneity in Stock Pricing: A STAR Model with Multivariate Transition Functions. (deposited 02. May 2011 23:51) [Currently Displayed]