Heterogeneity in stock prices: A STAR model with multivariate transition function

Lof, Matthijs (2010): Heterogeneity in stock prices: A STAR model with multivariate transition function.

Abstract

This paper applies a heterogeneous agent asset pricing model, featuring fundamentalists and chartists, to the price-dividend and price-earnings ratios of the S&P500 index. Agents update their beliefs according to macroeconomic information, as an alternative to evolutionary dynamics. For estimation, a STAR model is introduced, with a transition function depending on multiple transition variables. A procedure based on linearity testing is proposed to select the appropriate transition variables, and simultaneously estimate their respective weights. The results show that during periods of favorable economic conditions the fraction of chartists increases, causing stock prices to decouple from fundamentals.

• Item Type: MPRA Paper
• Language: English
• Keywords: Asset pricing, Heterogeneous beliefs, Smooth-transition autoregression
• 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

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