Structural Breaks, Incomplete Information and Stock Prices
AbstractThis paper presents empirical evidence on the existence of structural breaks in the fundamentals process underlying US stock prices. We develop an asset pricing model that represents breaks in the context of a Markov switching process with an expanding set of non-recurring 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 the serial correlation in stock returns after a break.
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Bibliographic InfoPaper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number qt1sn269d7.
Date of creation: 01 Jan 2001
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asset pricing; stocks; structural breaks;
Other versions of this item:
- Timmermann, Allan, 2001. "Structural Breaks, Incomplete Information, and Stock Prices," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(3), pages 299-314, July.
- Allan Timmermann, 1998. "Structural Breaks, Incomplete Information and Stock Prices," FMG Discussion Papers dp311, Financial Markets Group.
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