Asset pricing with disequilibrium price adjustment: theory and empirical evidence

Cheng-Few Lee, Chiung-Min Tsai and Alice C. Lee
Authors registered in the RePEc Author Service: Cheng Few Lee

Quantitative Finance, 2013, vol. 13, issue 2, 227-239

Abstract: Breeden [ J. Financial Econ. , 1979, 7 , 265--196], Grinols [ J. Finance , 1984, 39 (5), 1571--1595] and Cox et al . [ Econometrica , 1985, 53 , 363--384] describe the importance of including the supply side in capital asset pricing. Black [ Am. Econ. Rev ., 1976, 66 , 767--779] derives a dynamic, multi-period CAPM, integrating endogenous demand and supply. Based upon the papers of Black and Lee et al . [ Q. Rev. Econ. Finance , 2009, 49 , 811--828], we first derive a simultaneous equation asset pricing model. Then we test the simultaneous equation asset pricing model in terms of the disequilibrium models developed by Fair and Jaffee [ Econometrica , 1972, 40 , 497--514], Amemiya [ Econometrica , 1974, 42 , 759--762], Quandt [ The Econometrics of Disequilibrium , 1988], and others. We also discuss two methods of estimating an asset pricing model with a disequilibrium price adjustment effect. Finally, using price per share, dividend per share, and shares outstanding, we empirically test the existence of a price disequilibrium adjustment process with international index data and U.S. equity data. We find that a disequilibrium price adjustment process does, in fact, exist in our empirical data. Our results support the finding of Lo and Wang [ Rev. Financial Stud ., 2000, 13 , 257--300] that trading volume is an important factor in capital asset pricing.

Date: 2013
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DOI: 10.1080/14697688.2011.572901

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