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Modelling the Value of the S&P 500 - A System Dynamics Perspective

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Author Info
Carl Chiarella () (School of Finance and Economics, University of Technology, Sydney)
S. Gao () (Discipline of Economics, University of Sydney)

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Abstract

This paper seeks to model the adjustment process in the stock market by a continuous time state space model focusing on input-out relations. The value of the S&P 500 is generated as the output of the model with earnings and the interest rate as input. The model is found to fit the data well, and indicates that the stock price dynamics can be considered as a price-following-value process. The value determines the time varying trend of price, and random buy-sell pressure drives price fluctuations about value. The 1987 stock price bubble shows up clearly as a gap between price and value.

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File URL: http://www.business.uts.edu.au/finance/research/wpapers/wp115.pdf
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Publisher Info
Paper provided by School of Finance and Economics, University of Technology, Sydney in its series Working Paper Series with number 115.

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Date of creation: 01 Apr 2002
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Handle: RePEc:uts:wpaper:115

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Related research
Keywords: stock price; intrinsic value; stock price bubble; adjustment process;

Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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This page was last updated on 2009-12-2.

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