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Asset Pricing with Disequilibrium Price Adjustment: Theory and Empirical Evidence

In: HANDBOOK OF FINANCIAL ECONOMETRICS, MATHEMATICS, STATISTICS, AND MACHINE LEARNING

Author

Listed:
  • Cheng Few Lee
  • Chiung-Min Tsai
  • Alice C. Lee

Abstract

Breeden (1979), Grinols (1984), and Cox et al. (1985) describe the importance of supply side for the capital asset pricing. Black (1976) derives a dynamic, multi-period CAPM, integrating endogenous demand and supply. However, this theoretically elegant model has never been empirically tested for its implications in dynamic asset pricing. We first review and theoretically extend Black’s CAPM to allow for a price adjustment process. We then derive the disequilibrium model for asset pricing in terms of the disequilibrium model developed by Fair and Jaffe (1972), Amemiya (1974), Quandt (1988), and others. We discuss two methods of estimating an asset pricing model with disequilibrium price adjustment effect. Finally, using price per share, dividend per share, and outstanding shares data, we test the existence of price disequilibrium adjustment process with international index data and US equity data. We find that there exists disequilibrium price adjustment process in our empirical data. Our results support Lo and Wang’s (2000) findings that trading volume is one of the important factors in determining capital asset pricing.

Suggested Citation

  • Cheng Few Lee & Chiung-Min Tsai & Alice C. Lee, 2020. "Asset Pricing with Disequilibrium Price Adjustment: Theory and Empirical Evidence," World Scientific Book Chapters, in: Cheng Few Lee & John C Lee (ed.), HANDBOOK OF FINANCIAL ECONOMETRICS, MATHEMATICS, STATISTICS, AND MACHINE LEARNING, chapter 99, pages 3491-3516, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789811202391_0099
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    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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