IDEAS home Printed from https://ideas.repec.org/p/diw/diwwpp/dp1350.html
   My bibliography  Save this paper

Can Stock Price Fundamentals Properly be Captured?: Using Markov Switching in Heteroskedasticity Models to Test Identification Schemes

Author

Listed:
  • Anton Velinov

Abstract

Structural 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.

Suggested Citation

  • Anton Velinov, 2013. "Can Stock Price Fundamentals Properly be Captured?: Using Markov Switching in Heteroskedasticity Models to Test Identification Schemes," Discussion Papers of DIW Berlin 1350, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp1350
    as

    Download full text from publisher

    File URL: https://www.diw.de/documents/publikationen/73/diw_01.c.434681.de/dp1350.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Bénédicte Vidaillet & V. d'Estaintot & P. Abécassis, 2005. "Introduction," Post-Print hal-00287137, HAL.
    2. Herwartz, Helmut & Lütkepohl, Helmut, 2014. "Structural vector autoregressions with Markov switching: Combining conventional with statistical identification of shocks," Journal of Econometrics, Elsevier, vol. 183(1), pages 104-116.
    3. Rapach, David E., 2001. "Macro shocks and real stock prices," Journal of Economics and Business, Elsevier, vol. 53(1), pages 5-26.
    4. Lutkepohl, Helmut & Saikkonen, Pentti, 2000. "Testing for the cointegrating rank of a VAR process with a time trend," Journal of Econometrics, Elsevier, vol. 95(1), pages 177-198, March.
    5. Lee, Bong-Soo, 1998. "Permanent, Temporary, and Non-Fundamental Components of Stock Prices," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(1), pages 1-32, March.
    6. Nicolaas Groenewold, 2004. "Fundamental share prices and aggregate real output," Applied Financial Economics, Taylor & Francis Journals, vol. 14(9), pages 651-661.
    7. Laopodis, Nikiforos T., 2009. "Are fundamentals still relevant for European economies in the post-Euro period?," Economic Modelling, Elsevier, vol. 26(5), pages 835-850, September.
    8. Allen, D.E & Yang, W, 2004. "Do UK stock prices deviate from fundamentals?," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 64(3), pages 373-383.
    9. Saikkonen, Pentti & Lutkepohl, Helmut, 2000. "Testing for the Cointegrating Rank of a VAR Process with Structural Shifts," Journal of Business & Economic Statistics, American Statistical Association, vol. 18(4), pages 451-464, October.
    10. Lütkepohl,Helmut & Krätzig,Markus (ed.), 2004. "Applied Time Series Econometrics," Cambridge Books, Cambridge University Press, number 9780521839198.
    11. Jean Louis, Rosmy & Eldomiaty, Tarek, 2010. "How do stock prices respond to fundamental shocks in the case of the United States? Evidence from NASDAQ and DJIA," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(3), pages 310-322, August.
    12. Lanne, Markku & Lütkepohl, Helmut & Maciejowska, Katarzyna, 2010. "Structural vector autoregressions with Markov switching," Journal of Economic Dynamics and Control, Elsevier, vol. 34(2), pages 121-131, February.
    13. Zacharias Psaradakis & Nicola Spagnolo, 2006. "Joint Determination of the State Dimension and Autoregressive Order for Models with Markov Regime Switching," Journal of Time Series Analysis, Wiley Blackwell, vol. 27(5), pages 753-766, September.
    14. Binswanger, Mathias, 2000. "Stock market booms and real economic activity: Is this time different?," International Review of Economics & Finance, Elsevier, vol. 9(4), pages 387-415, October.
    15. Lütkepohl,Helmut & Krätzig,Markus (ed.), 2004. "Applied Time Series Econometrics," Cambridge Books, Cambridge University Press, number 9780521547871.
    16. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, Decembrie.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lütkepohl, Helmut & Netšunajev, Aleksei, 2017. "Structural vector autoregressions with heteroskedasticity: A review of different volatility models," Econometrics and Statistics, Elsevier, vol. 1(C), pages 2-18.
    2. Helmut Lütkepohl & Aleksei Netšunajev, 2015. "Structural Vector Autoregressions with Heteroskedasticity - A Comparison of Different Volatility Models," CESifo Working Paper Series 5308, CESifo.
    3. Lütkepohl, Helmut & Velinov, Anton, 2016. "Structural Vector Autoregressions : Checking Identifying Long-Run Restrictions via Heteroskedasticity," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 30, pages 377-392.
    4. Helmut Lütkepohl & Aleksei Netšunajev, 2015. "Structural Vector Autoregressions with Heteroskedasticy," SFB 649 Discussion Papers SFB649DP2015-015, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Velinov, Anton, 2016. "On the importance of testing structural identification schemes and the potential consequences of incorrectly identified models," VfS Annual Conference 2016 (Augsburg): Demographic Change 145581, Verein für Socialpolitik / German Economic Association.
    2. Velinov, Anton & Chen, Wenjuan, 2015. "Do stock prices reflect their fundamentals? New evidence in the aftermath of the financial crisis," Journal of Economics and Business, Elsevier, vol. 80(C), pages 1-20.
    3. Lütkepohl, Helmut & Velinov, Anton, 2016. "Structural Vector Autoregressions : Checking Identifying Long-Run Restrictions via Heteroskedasticity," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 30, pages 377-392.
    4. Anton Velinov & Wenjuan Chen, 2014. "Are There Bubbles in Stock Prices?: Testing for Fundamental Shocks," Discussion Papers of DIW Berlin 1375, DIW Berlin, German Institute for Economic Research.
    5. Ralf Brüggemann & Helmut Lütkepohl, 2006. "A small monetary system for the euro area based on German data," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(6), pages 683-702, September.
    6. Mark J. Holmes & Theodore Panagiotidis & Abhijit Sharma, 2007. "The Sustainability of India's current account (1950-2003): Evidence from parametric and non-parametric unit root and cointegration tests," Working Paper series 41_07, Rimini Centre for Economic Analysis.
    7. Aaron Mehrotra, 2008. "Demand for Money in Transition: Evidence from China’s Disinflation," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 14(1), pages 36-47, February.
    8. Aaron Mehrotra, 2008. "Demand for Money in Transition: Evidence from China’s Disinflation," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 14(1), pages 36-47, February.
    9. Byrne, Joseph P. & Nagayasu, Jun, 2010. "Structural breaks in the real exchange rate and real interest rate relationship," Global Finance Journal, Elsevier, vol. 21(2), pages 138-151.
    10. Sven Schreiber, 2012. "Estimating the natural rate of unemployment in euro-area countries with co-integrated systems," Applied Economics, Taylor & Francis Journals, vol. 44(10), pages 1315-1335, April.
    11. repec:zbw:bofitp:2006_010 is not listed on IDEAS
    12. Koukouritakis, Minoas, 2013. "Expectations hypothesis in the context of debt crisis: Evidence from five major EU countries," Research in Economics, Elsevier, vol. 67(3), pages 243-258.
    13. Koivu, Tuuli, 2012. "Monetary policy, asset prices and consumption in China," Economic Systems, Elsevier, vol. 36(2), pages 307-325.
    14. Velinov, Anton, 2018. "On the importance of testing structural identification schemes and the potential consequences of incorrectly identified models," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 2(1), pages 106-126.
    15. Eleftheriou, Maria, 2017. "Did the Bundesbank react to the US dollar exchange rate?," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 235-244.
    16. Eleftheriou, Maria, 2009. "Monetary policy in Germany: A cointegration analysis on the relevance of interest rate rules," Economic Modelling, Elsevier, vol. 26(5), pages 946-960, September.
    17. Brüggemann, Ralf & Jentsch, Carsten & Trenkler, Carsten, 2016. "Inference in VARs with conditional heteroskedasticity of unknown form," Journal of Econometrics, Elsevier, vol. 191(1), pages 69-85.
    18. Ihle, R. & Brümmer, B. & Thompson, S.R., 2011. "Auswirkungen der Fischler-Reform und der Blauzungenkrankheit auf die Europäischen Kälbermärkte," Proceedings “Schriften der Gesellschaft für Wirtschafts- und Sozialwissenschaften des Landbaues e.V.”, German Association of Agricultural Economists (GEWISOLA), vol. 46, March.
    19. Helmut Lütkepohl, 2013. "Vector autoregressive models," Chapters, in: Nigar Hashimzade & Michael A. Thornton (ed.), Handbook of Research Methods and Applications in Empirical Macroeconomics, chapter 6, pages 139-164, Edward Elgar Publishing.
    20. Elena Argentesi & Helmut Lütkepohl & Massimo Motta, 2010. "Acquisition of Information and Share Prices: An Empirical Investigation of Cognitive Dissonance," German Economic Review, Verein für Socialpolitik, vol. 11(3), pages 381-396, August.
    21. Carsten Trenkler & Pentti Saikkonen & Helmut Lütkepohl, 2008. "Testing for the Cointegrating Rank of a VAR Process with Level Shift and Trend Break," Journal of Time Series Analysis, Wiley Blackwell, vol. 29(2), pages 331-358, March.

    More about this item

    Keywords

    Markov switching model; vector autoregression; vector error correction; heteroskedasticity; stock prices;
    All these keywords.

    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; State Space Models
    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:diw:diwwpp:dp1350. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Bibliothek (email available below). General contact details of provider: https://edirc.repec.org/data/diwbede.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.