Noncausality 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

Lof, Matthijs, Noncausality and Asset Pricing (April 7, 2011). Studies in Nonlinear Dynamics and Econometrics, Vol. 17, 2013, Available at SSRN: https://ssrn.com/abstract=1804879 or http://dx.doi.org/10.2139/ssrn.1804879

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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