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Heterogeneity in Stock Pricing: A STAR Model with Multivariate Transition Functions

  • Lof, Matthijs

Stock prices often diverge from measures of fundamental value, which simple present value models fail to explain. This paper tries to find causes for these long-run price movements and their persistence by estimating a STAR model for the price-earnings ratio of the S&P500 index for 1961Q1 - 2009Q3, with a transition function that depends on a wider set of exogenous or predetermined transition variables. Several economic, monetary and financial variables, as well as linear combinations of these, are found to have nonlinear effects on stock prices. A two-step estimation procedure is proposed to select the transition variables and estimate their weights. This STAR model can be interpreted as a heterogeneous agent asset pricing model that makes a distinction between chartists and fundamentalists, where the set of transition variables is included in the agents’ information set.

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File URL: http://mpra.ub.uni-muenchen.de/30520/1/MPRA_paper_30520.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 30520.

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Date of creation: 01 Jul 2010
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Handle: RePEc:pra:mprapa:30520
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  1. van Dijk, D.J.C. & Franses, Ph.H.B.F., 1997. "Modelling Multiple Regimes in the Business Cycle," Econometric Institute Research Papers EI 9734/A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
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  12. Eugene F. Fama & Kenneth R. French, . "Disappearing Dividends: Changing Firm Characteristics or Lower Propensity to Pay?."," CRSP working papers 509, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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