Heterogeneity in Stock Prices: A STAR Model with Multivariate Transition Function
26 Pages Posted: 11 Aug 2010 Last revised: 22 Jul 2014
Date Written: April 24, 2012
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.
Keywords: Asset pricing, Heterogeneous beliefs, Smooth-transition autoregression
JEL Classification: G12, E44, C22
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Coordination of Expectations in Asset Pricing Experiments
By Cars H. Hommes, Joep Sonnemans, ...
-
Behavioral Heterogeneity in Stock Prices
By H. Peter Boswijk, Cars H. Hommes, ...
-
Behavioral Heterogeneity in Stock Prices
By H. Peter Boswijk, Cars H. Hommes, ...
-
Heterogeneity, Market Mechanisms, and Asset Price Dynamics
By Carl Chiarella, Roberto Dieci, ...
-
Complex Evolutionary Systems in Behavioral Finance
By Cars H. Hommes and Florian Wagener
-
More Hedging Instruments May Destabilize Markets
By William A. Brock, Cars H. Hommes, ...
-
By Anke Gerber, Bodo Vogt, ...