Can Stock Price Fundamentals Properly be Captured?: Using Markov Switching in Heteroskedasticity Models to Test Identification Schemes
AbstractStructural identification schemes are of essential importance to vector autoregressive (VAR) analysis. This paper tests a commonly used structural parameter identification scheme to assess whether it can properly capture fundamental and non-fundamental shocks to stock prices. In particular, five related structural models, which are widely used in the literature on assessing stock price determinants are considered. They are either specified in vector error correction (VEC) or in VAR form. Restrictions on the long-run effects matrix are used to identify the structural parameters. These identifying restrictions are tested by means of a Markov switching in heteroskedasticity model. It is found that for two of the five models considered, the long-run identification scheme appropriately classifies shocks as being either fundamental or non-fundamental. A series of robustness tests are performed, which largely confirm the initial findings.
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Bibliographic InfoPaper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1350.
Length: 29 p.
Date of creation: 2013
Date of revision:
Markov switching model; vector autoregression; vector error correction; heteroskedasticity; stock prices;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-01-17 (All new papers)
- NEP-ECM-2014-01-17 (Econometrics)
- NEP-ORE-2014-01-17 (Operations Research)
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