Nonlinear stock prices adjustment in the G7 countries
AbstractThis paper aims to modeling stock prices adjustment dynamics toward their fundamentals. We used the class of Switching Transition Error Correction Models (STECM) and we showed that stock prices deviations toward fundamentals could be characterized by nonlinear adjustment process with mean reversion. First, according to Anderson (1997), De Grauwe and Grimaldi (2005) and Boswijk et al.(2006), we justify these nonlinearities by the presence of heterogeneous transaction costs, behavioural heterogeneity and the interaction between shareholders expectations. After, we present STECM specification. We apply this model to describe the G7 indexes adjustment dynamics toward their fundamentals. We showed that the G7 stock indexes adjustment is smooth and nonlinearly mean-reverting and that the convergence speeds vary according to the disequilibrium extent. Finally, using two indicators proposed by Peel and Taylor (2000), we determine phases of under- and overvaluation of stock prices and measure intensity of stock prices adjustment strengths.
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Date of creation: 18 Sep 2007
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Stock Prices; Heterogeneous Transaction Costs; Nonlinear Adjustment;
Other versions of this item:
- Fredj Jawadi & Georges Prat, 2009. "Nonlinear Stock Price Adjustment in the G7 Countries," EconomiX Working Papers 2009-21, University of Paris West - Nanterre la Défense, EconomiX.
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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- Arouri, Mohamed & Jawadi, Fredj & Nguyen, Duc Khuong, 2013.
"What can we tell about monetary policy synchronization and interdependence over the 2007–2009 global financial crisis?,"
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- Mohamed El Hedi Arouri & Duc Khuong Nguyen & Fredj Jawadi, 2010. "What can we tell about monetary policy synchronization and interdependence over the 2007-2009 global financial crisis?," Working Papers hal-00507826, HAL.
- Fredj Jawadi & Ricardo M. Sousa, 2012.
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- Jawadi, Fredj & Leoni, Patrick, 2009. "Threshold cointegration relationships between oil and stock markets," Discussion Papers of Business and Economics 3/2009, Department of Business and Economics, University of Southern Denmark.
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- Mohamed E AROURI & Fredj JAWADI & Duc K NGUYEN, 2012. "Nonlinear modeling of oil and stock price dynamics: segmentation or time-varying integration?," Economics Bulletin, AccessEcon, vol. 32(3), pages 2481-2489.
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