Modelling the Value of the S&P 500 - a System Dynamics Perspective

University of Technology, Finance and Economics Working Paper No. 115

25 Pages Posted: 3 Feb 2006

See all articles by Carl Chiarella

Carl Chiarella

University of Technology, Sydney - UTS Business School, Finance Discipline Group

Shenhuai Gao

University of Sydney Business School

Date Written: April 2002

Abstract

This paper seeks to model the adjustment process in the stock market by a continuous time state space model focusing on input-out relations. The value of the S&P 500 is generated as the output of the model with earnings and the interest rate as input. The model is found to fit the data well, and indicates that the stock price dynamics can be considered as a price-following-value process. The value determines the time varying trend of price, and random buy-sell pressure drives price fluctuations about value. The 1987 stock price bubble shows up clearly as a gap between price and value.

Keywords: stock price, intrinsic value, stock price bubble, adjustment process

JEL Classification: C22, C51, G12

Suggested Citation

Chiarella, Carl and Gao, Shenhuai, Modelling the Value of the S&P 500 - a System Dynamics Perspective (April 2002). University of Technology, Finance and Economics Working Paper No. 115, Available at SSRN: https://ssrn.com/abstract=880001 or http://dx.doi.org/10.2139/ssrn.880001

Carl Chiarella (Contact Author)

University of Technology, Sydney - UTS Business School, Finance Discipline Group ( email )

PO Box 123
Broadway, NSW 2007
Australia
+61 2 9514 7719 (Phone)
+61 2 9514 7711 (Fax)

HOME PAGE: http://www.business.uts.edu.au/finance/

Shenhuai Gao

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

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