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

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  • Lof, Matthijs

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 linear combination of transition variables. The results show that during periods of favorable economic conditions the fraction of chartists increases, causing stock prices to decouple from fundamentals.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 36 (2012)
Issue (Month): 12 ()
Pages: 1845-1854

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Handle: RePEc:eee:dyncon:v:36:y:2012:i:12:p:1845-1854

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Asset pricing; Heterogeneous beliefs; Smooth-transition autoregression;

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Citations

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Cited by:
  1. Hendrik Kaufmannz & Robinson Kruse, 2013. "Bias-corrected estimation in potentially mildly explosive autoregressive models," CREATES Research Papers 2013-10, School of Economics and Management, University of Aarhus.
  2. Assenza, T. & Brock, W.A. & Hommes, C.H., 2012. "Animal Spirits, Heterogeneous Expectations and the Amplification and Duration of Crises," CeNDEF Working Papers 12-07, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  3. Tiziana Assenza & William Brock & Cars Hommes, 2013. "Animal Spirits, Heterogeneous Expectations and the Emergence of Booms and Busts," DISCE - Working Papers del Dipartimento di Economia e Finanza def7, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
  4. Lof, Matthijs, 2012. "Rational Speculators, Contrarians and Excess Volatility," MPRA Paper 43490, University Library of Munich, Germany.
  5. Baur, Dirk G. & Glover, Kristoffer J., 2014. "Heterogeneous expectations in the gold market: Specification and estimation," Journal of Economic Dynamics and Control, Elsevier, vol. 40(C), pages 116-133.
  6. Tiziana Assenza & William A. Brock & Cars H. Hommes, 2013. "Animal Spirits, Heterogeneous Expectations and the Emergence of Booms and Busts," Tinbergen Institute Discussion Papers 13-205/II, Tinbergen Institute.

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