Asset Pricing with Disequilibrium Price Adjustment: Theory and Empirical Evidence

Cheng Few Lee, Chiung-Min Tsai and Alice C. Lee

Chapter 99 in Handbook of Financial Econometrics, Mathematics, Statistics, and Machine Learning:(In 4 Volumes), 2020, pp 3491-3516 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Breeden (1979), Grinols (1984), and Cox et al. (1985) describe the importance of supply side for the capital asset pricing. Black (1976) derives a dynamic, multi-period CAPM, integrating endogenous demand and supply. However, this theoretically elegant model has never been empirically tested for its implications in dynamic asset pricing. We first review and theoretically extend Black’s CAPM to allow for a price adjustment process. We then derive the disequilibrium model for asset pricing in terms of the disequilibrium model developed by Fair and Jaffe (1972), Amemiya (1974), Quandt (1988), and others. We discuss two methods of estimating an asset pricing model with disequilibrium price adjustment effect. Finally, using price per share, dividend per share, and outstanding shares data, we test the existence of price disequilibrium adjustment process with international index data and US equity data. We find that there exists disequilibrium price adjustment process in our empirical data. Our results support Lo and Wang’s (2000) findings that trading volume is one of the important factors in determining capital asset pricing.

Keywords: Financial Econometrics; Financial Mathematics; Financial Statistics; Financial Technology; Machine Learning; Covariance Regression; Cluster Effect; Option Bound; Dynamic Capital Budgeting; Big Data (search for similar items in EconPapers)
JEL-codes: C01 C1 G32 (search for similar items in EconPapers)
Date: 2020
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Journal Article: Asset pricing with disequilibrium price adjustment: theory and empirical evidence (2013)
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