On Markov Error-Correction Models, with an Application to Stock Prices and Dividends

Journal of Applied Econometrics, Vol. 19, pp. 69-88, 2004

Posted: 6 Dec 2004

See all articles by Zacharias Psaradakis

Zacharias Psaradakis

University of London - Economics, Mathematics and Statistics

Martín Sola

Universidad Torcuato Di Tella; University of London - Economics, Mathematics and Statistics

Fabio Spagnolo

Brunel University London - Economics and Finance

Abstract

This paper considers Markov error-correction (MEC) models in which deviations from the long-run equilibrium are characterised by different rates of adjustment. To motivate our analysis and illustrate the various issues involved, our discussion is structured around the analysis of the long-run properties of US stock prices and dividends. It is shown that the MEC model is flexible enough to account for situations where deviations from the long-run equilibrium are nonstationary in one state of nature and allows us to test for such a possibility. An empirical specification procedure to establish the existence of MEC adjustment in practice is also presented. This is based on a multi-step test procedure that exploits the differences between the global and local characteristics of systems with MEC adjustment.

Keywords: Cointegration, Error-correction model, Markov chain, Stock prices

JEL Classification: C22, C32, G12

Suggested Citation

Psaradakis, Zacharias and Sola, Martín and Spagnolo, Fabio, On Markov Error-Correction Models, with an Application to Stock Prices and Dividends. Journal of Applied Econometrics, Vol. 19, pp. 69-88, 2004. Available at SSRN: https://ssrn.com/abstract=626802

Zacharias Psaradakis (Contact Author)

University of London - Economics, Mathematics and Statistics ( email )

7-15 Gresse Street
London, WC1E 7HX
United Kingdom
+44 20 7631 6415 (Phone)
+44 20 7631 6416 (Fax)

HOME PAGE: http://www.econ.bbk.ac.uk/faculty/psaradakis/

Martín Sola

Universidad Torcuato Di Tella ( email )

Minones 2159
1428 Buenos Aires, 1428
Argentina
5411 4784 0080 (Phone)
5411 4784 9807 (Fax)

University of London - Economics, Mathematics and Statistics ( email )

Malet Street
London, WC1E 7HX
United Kingdom
+44 20 7631 6411 (Phone)
+44 20 7631 6416 (Fax)

HOME PAGE: http://www.econ.bbk.ac.uk/faculty/sola/

Fabio Spagnolo

Brunel University London - Economics and Finance ( email )

Uxbridge UB8 3PH
United Kingdom
+44 1895 816383 (Phone)
+44 1895 203303 (Fax)

HOME PAGE: http://www.brunel.ac.uk/depts/ecf/Staff/SpagnoloF/Main.htm

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