Heterogeneity in stock prices: A STAR model with multivariate transition function

Matthijs Lof

Journal of Economic Dynamics and Control, 2012, vol. 36, issue 12, 1845-1854

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 (search for similar items in EconPapers)
JEL-codes: C22 E44 G12 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (45)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:36:y:2012:i:12:p:1845-1854

DOI: 10.1016/j.jedc.2012.06.006

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