Download This PaperNoncausality and Asset Pricing
17 Pages Posted: 11 Apr 2011 Last revised: 22 Jul 2014
Date Written: April 7, 2011
Abstract
Misspecification of agents' information sets or expectation formation mechanisms may lead to noncausal autoregressive representations of asset prices. Annual US stock prices are found to be noncausal, implying that agents' expectations are not revealed to an outside observer such as an econometrician observing only realized market data. A simulation study shows that noncausal processes can be generated by asset-pricing models featuring heterogeneous expectations.
Keywords: noncausal autoregressions, stock prices, heterogeneous expectations
JEL Classification: C58, D84, G12, G17
Suggested Citation: Suggested Citation
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