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Heterogeneity in stock prices: A STAR model with multivariate transition function

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  • Lof, Matthijs

Abstract

This paper applies a heterogeneous agent asset pricing model, featuring fundamentalists and chartists, to the price-dividend and price-earnings ratios of the S&P500 index. Agents update their beliefs according to macroeconomic information, as an alternative to evolutionary dynamics. For estimation, a STAR model is introduced, with a transition function depending on multiple transition variables. A procedure based on linearity testing is proposed to select the appropriate linear combination of transition variables. The results show that during periods of favorable economic conditions the fraction of chartists increases, causing stock prices to decouple from fundamentals.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 36 (2012)
Issue (Month): 12 ()
Pages: 1845-1854

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Handle: RePEc:eee:dyncon:v:36:y:2012:i:12:p:1845-1854
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

Keywords: Asset pricing; Heterogeneous beliefs; Smooth-transition autoregression;

Find related papers by JEL classification:

  • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
  • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
  • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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Cited by:

  1. repec:ctc:serie1:def7 is not listed on IDEAS
  2. Assenza, T. & Brock, W.A. & Hommes, C.H., 2012. "Animal Spirits, Heterogeneous Expectations and the Amplification and Duration of Crises," CeNDEF Working Papers 12-07, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  3. Lof, Matthijs, 2012. "Rational Speculators, Contrarians and Excess Volatility," MPRA Paper 43490, University Library of Munich, Germany.
  4. Julian S. Leppin & Stefan Reitz, 2014. "Real Financial Market Exchange Rates and Capital Flows," Kiel Working Papers 1946, Kiel Institute for the World Economy.
  5. Leppin, Julian S. & Reitz, Stefan, 2014. "The role of a changing market: Environment for credit default swap pricing," HWWI Research Papers 153, Hamburg Institute of International Economics (HWWI).
  6. Pierdzioch, Christian & Reitz, Stefan & Ruelke, Jan-Christoph, 2014. "Heterogeneous Forecasters and Nonlinear Expectation Formation in the U.S. Stock Market," FinMaP-Working Papers 11, Collaborative EU Project FinMaP - Financial Distortions and Macroeconomic Performance: Expectations, Constraints and Interaction of Agents.
  7. repec:dgr:uvatin:20130205 is not listed on IDEAS
  8. Lof, Matthijs, 2013. "Essays on Expectations and the Econometrics of Asset Pricing," MPRA Paper 59064, University Library of Munich, Germany.
  9. Leppin, Julian Sebastian, 2014. "The relation between overreaction in forecasts and uncertainty: A nonlinear approachvon," HWWI Research Papers 158, Hamburg Institute of International Economics (HWWI).
  10. Goldbaum, David & Zwinkels, Remco C.J., 2014. "An empirical examination of heterogeneity and switching in foreign exchange markets," Journal of Economic Behavior & Organization, Elsevier, vol. 107(PB), pages 667-684.
  11. Hendrik Kaufmannz & Robinson Kruse, 2013. "Bias-corrected estimation in potentially mildly explosive autoregressive models," CREATES Research Papers 2013-10, School of Economics and Management, University of Aarhus.
  12. Leppin, Julian Sebstian, 2014. "The Relation Between Overreaction in Forecasts and Uncertainty: A Nonlinear Approach," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100284, Verein für Socialpolitik / German Economic Association.
  13. Baur, Dirk G. & Glover, Kristoffer J., 2014. "Heterogeneous expectations in the gold market: Specification and estimation," Journal of Economic Dynamics and Control, Elsevier, vol. 40(C), pages 116-133.

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