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

Lof, Matthijs, Heterogeneity in Stock Prices: A STAR Model with Multivariate Transition Function (April 24, 2012). Journal of Economic Dynamics and Control, Vol. 13, No. 12, 2012, Available at SSRN: https://ssrn.com/abstract=1656502 or http://dx.doi.org/10.2139/ssrn.1656502

Matthijs Lof (Contact Author)

Aalto University ( email )

P.O. Box 21210
Helsinki, 00101
Finland

HOME PAGE: http://sites.google.com/site/matthijslof/

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