Structural Breaks, Incomplete Information, and Stock Prices
AbstractThis article presents empirical evidence on the existence of structural breaks in the fundamentals process underlying U.S. stock prices. I develop an asset-pricing model that represents breaks in the context of a Markov switching process with an expanding set of nonrecurring states. Different hypotheses on how investors form expectations about future dividends after a break are proposed and analyzed. A model in which investors do not have full information about the parameters of the dividend process but gradually update their beliefs as new information arrives is shown to induce skewness, kurtosis, volatility clustering, and serial correlation in stock returns after a break.
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Bibliographic InfoArticle provided by American Statistical Association in its journal Journal of Business and Economic Statistics.
Volume (Year): 19 (2001)
Issue (Month): 3 (July)
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Web page: http://www.amstat.org/publications/jbes/index.cfm?fuseaction=main
Other versions of this item:
- Allan Timmermann, 1998. "Structural Breaks, Incomplete Information and Stock Prices," FMG Discussion Papers dp311, Financial Markets Group.
- Timmermann, Allan, 2001. "Structural Breaks, Incomplete Information and Stock Prices," University of California at San Diego, Economics Working Paper Series qt1sn269d7, Department of Economics, UC San Diego.
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