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Efficient estimation of price adjustment coefficients

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Author Info
Lyhagen, Johan () (Department of Infomation Science)

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Abstract

The price adjustment coefficient model of Amihud and Mendelson (1987) is shown to be suitable for estimation by the Kalman filter. A techique that, under some commonly used conditions, is asymptotically efficient. By Monte Carlo simulations it is shown that both bias and mean squared error are much smaler compared to the estimator proposed by Damodaran and Lim (1991) and Damodaran (1993). A test for the adeqacy of the model is also proposed. Using data from four minor, the nordic countries except Iceland, and one major, US, stock markets the results are that the markets under-react to new information, but for most of the nordic countries, the model is not adequate.

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Publisher Info
Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 332.

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Length: 8 pages
Date of creation: 20 Sep 1999
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Handle: RePEc:hhs:hastef:0332

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Related research
Keywords: Estimation; efficiency; price adjustment;

Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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