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

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Listed author(s):
  • 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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File URL: http://www.sciencedirect.com/science/article/pii/S016518891200142X
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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
DOI: 10.1016/j.jedc.2012.06.006
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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