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Noncausality and Asset Pricing

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  • Lof, Matthijs

Abstract

Misspecification of agents' information sets or expectation formation mechanisms maylead to noncausal autoregressive representations of asset prices. Annual US stock prices are found to be noncausal, implying that agents' expectations are not revealed to an outside observer such as an econometrician observing only realized market data. A simulation study shows that noncausal processes can be generated by asset-pricing models featuring heterogeneous expectations.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 30519.

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Date of creation: 08 Apr 2011
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Handle: RePEc:pra:mprapa:30519

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Keywords: noncausal autoregressions; stock prices; heterogeneous expectations;

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  1. Brock, William A. & Hommes, Cars H., 1998. "Heterogeneous beliefs and routes to chaos in a simple asset pricing model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1235-1274, August.
  2. Campbell, John & Shiller, Robert, 1987. "Cointegration and Tests of Present Value Models," Scholarly Articles 3122490, Harvard University Department of Economics.
  3. Lanne Markku & Saikkonen Pentti, 2011. "Noncausal Autoregressions for Economic Time Series," Journal of Time Series Econometrics, De Gruyter, vol. 3(3), pages 1-32, October.
  4. Markku Lanne & Arto Luoma & Jani Luoto, 2012. "Bayesian Model Selection And Forecasting In Noncausal Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 27(5), pages 812-830, 08.
  5. Lanne, Markku & Luoto, Jani & Saikkonen, Pentti, 2010. "Optimal Forecasting of Noncausal Autoregressive Time Series," MPRA Paper 23648, University Library of Munich, Germany.
  6. Lucia Alessi & Matteo Barigozzi & Marco Capasso, 2011. "Non‐Fundamentalness in Structural Econometric Models: A Review," International Statistical Review, International Statistical Institute, vol. 79(1), pages 16-47, 04.
  7. Breid, F. Jay & Davis, Richard A. & Lh, Keh-Shin & Rosenblatt, Murray, 1991. "Maximum likelihood estimation for noncausal autoregressive processes," Journal of Multivariate Analysis, Elsevier, vol. 36(2), pages 175-198, February.
  8. Townsend, Robert M, 1983. "Forecasting the Forecasts of Others," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 546-88, August.
  9. Ken Kasa & Todd Walker & Charles Whiteman, 2012. "Heterogenous Beliefs and Tests of Present Value Models," Discussion Papers dp12-06, Department of Economics, Simon Fraser University.
  10. Parke, William R. & Waters, George A., 2007. "An evolutionary game theory explanation of ARCH effects," Journal of Economic Dynamics and Control, Elsevier, vol. 31(7), pages 2234-2262, July.
  11. Lanne, Markku & Saikkonen, Pentti, 2009. "Noncausal vector autoregression," Research Discussion Papers 18/2009, Bank of Finland.
  12. Markku Lanne & Pentti Saikkonen, 2011. "GMM Estimation with Non‐causal Instruments," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 73(5), pages 581-592, October.
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Cited by:
  1. Lof, Matthijs, 2012. "Rational Speculators, Contrarians and Excess Volatility," MPRA Paper 43490, University Library of Munich, Germany.
  2. Markku Lanne, 2013. "Noncausality and Inflation Persistence," Discussion Papers of DIW Berlin 1286, DIW Berlin, German Institute for Economic Research.
  3. Lanne, Markku & Saikkonen, Pentti, 2010. "Noncausal Vector Autoregression," MPRA Paper 23717, University Library of Munich, Germany.

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