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On Markov error-correction models, with an application to stock prices and dividends

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Author Info
Zacharias Psaradakis (Birkbeck College, London, UK)
Martin Sola
Fabio Spagnolo (Birkbeck College, London, UK)

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Abstract

This paper considers Markov error-correction (MEC) models in which deviations from the long-run equilibrium are characterized by different rates of adjustment. To motivate our analysis and illustrate the various issues involved, our discussion is structured around the analysis of the long-run properties of US stock prices and dividends. It is shown that the MEC model is flexible enough to account for situations where deviations from the long-run equilibrium are nonstationary in one of the states of nature and allows us to test for such a possibility. An empirical specification procedure to establish the existence of MEC adjustment in practice is also presented. This is based on a multi-step test procedure that exploits the differences between the global and local characteristics of systems with MEC adjustment. Copyright © 2004 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/jae.729
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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 19 (2004)
Issue (Month): 1 ()
Pages: 69-88
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Handle: RePEc:jae:japmet:v:19:y:2004:i:1:p:69-88

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  14. Andrews, Donald W K & Monahan, J Christopher, 1992. "An Improved Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimator," Econometrica, Econometric Society, vol. 60(4), pages 953-66, July. [Downloadable!] (restricted)
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  20. Hall, Stephen G & Psaradakis, Zacharias & Sola, Martin, 1999. "Detecting Periodically Collapsing Bubbles: A Markov-Switching Unit Root Test," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(2), pages 143-54, March-Apr. [Downloadable!]
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  26. W. A. Broock & J. A. Scheinkman & W. D. Dechert & B. LeBaron, 1996. "A test for independence based on the correlation dimension," Econometric Reviews, Taylor and Francis Journals, vol. 15(3), pages 197-235. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jose Eduardo de A. Ferreira, 2006. "Effects of Fundamentals on the Exchange Rate: A Panel Analysis for a Sample of Industrialised and Emerging Economies," Studies in Economics 0603, Department of Economics, University of Kent. [Downloadable!]
  2. marzia raybaudi & martin sola & fabio spagnolod, 2003. "Red Signals: Trade Deficits and the Current Account," Public Policy Discussion Papers 03-14, Economics and Finance Section, School of Social Sciences, Brunel University. [Downloadable!]
    Other versions:
  3. Vasco Gabriel & Fernando Alexandre & Pedro Bação, 2007. "The Consumption-Wealth Ratio Under Asymmetric Adjustment," GEMF Working Papers 2007-06, GEMF - Faculdade de Economia, Universidade de Coimbra. [Downloadable!]
    Other versions:
  4. Dennis Kristensen & Anders Rahbek, 2007. "Likelihood-Based Inference in Nonlinear Error-Correction Models," CREATES Research Papers 2007-38, School of Economics and Management, University of Aarhus. [Downloadable!]
  5. Vasco Gabriel & Pataaree Sangduan, 2009. "Assessing Fiscal Sustainability Subject to Policy Changes: a Markov Switching Cointegration Approach," Department of Economics Discussion Papers 0309, Department of Economics, University of Surrey. [Downloadable!]
  6. Manzan, S., 2003. "Nonlinear Mean Reversion in Stock Prices," CeNDEF Working Papers 03-02, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance. [Downloadable!]
  7. Frömmel, Michael & Schmidt, Torsten, 2006. "Bank Lending and Asset Prices in the Euro Area," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-342, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
    Other versions:
  8. Myung Hwan Seo, 2007. "Estimation of Nonlinear Error CorrectionModels," STICERD - Econometrics Paper Series /2007/517, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE. [Downloadable!]
  9. Ihle, R. & von Cramon-Taubadel, S., 2008. "Nonlinear Vector Error Correction Models in Price Transmission Analysis: Threshold Models vs. Markov-Switching Models," 2008 International Congress, August 26-29, 2008, Ghent, Belgium 44198, European Association of Agricultural Economists. [Downloadable!]
  10. Ihle, Rico & Cramon-Taubadel, Stephan von, 2008. "A Comparison of Threshold Cointegration and Markov-Switching Vector Error Correction Models in Price Transmission Analysis," 2008 Conference, April 21-22, 2008, St. Louis, Missouri 37603, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management. [Downloadable!]
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