Can Stock Price Fundamentals Properly be Captured?: Using Markov Switching in Heteroskedasticity Models to Test Identification Schemes

Anton Velinov

No 1350, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: Structural identification schemes are of essential importance to vector autoregressive (VAR) analysis. This paper tests a commonly used structural parameter identification scheme to assess whether it can properly capture fundamental and non-fundamental shocks to stock prices. In particular, five related structural models, which are widely used in the literature on assessing stock price determinants are considered. They are either specified in vector error correction (VEC) or in VAR form. Restrictions on the long-run effects matrix are used to identify the structural parameters. These identifying restrictions are tested by means of a Markov switching in heteroskedasticity model. It is found that for two of the five models considered, the long-run identification scheme appropriately classifies shocks as being either fundamental or non-fundamental. A series of robustness tests are performed, which largely confirm the initial findings.

Keywords: Markov switching model; vector autoregression; vector error correction; heteroskedasticity; stock prices (search for similar items in EconPapers)
JEL-codes: C32 C34 (search for similar items in EconPapers)
Pages: 29 p.
Date: 2013
New Economics Papers: this item is included in nep-ecm and nep-ore
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Citations: View citations in EconPapers (9)

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