Nonlinear Stock Price Adjustment in the G7 Countries

Fredj Jawadi and Georges Prat (georges.prat@parisnanterre.fr)
Additional contact information
Georges Prat: EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique

Working Papers from HAL

Abstract: This paper seeks to address the stock price adjustment toward fundamentals. Using the class of Switching Transition Error Correction Models (STECMs), we show that two regimes describe the dynamics of stock price deviations from fundamentals in the G7 countries over the period 1969-2005. Deviations appear to follow a quasi random walk in the central regime when prices are near fundamentals (i.e. transaction costs being greater than expected gains, the mean reversion mechanism is inactive), while they approach a white noise in the outer regimes (i.e. transaction costs being lower than expected gains, the mean reversion works). As expected when transaction costs are heterogeneous, the STECM shows that stock price adjustments are smooth, implying that the convergence speed is time-varying according to the size of the deviation. Finally, using appropriate indicators, both the magnitudes of under- and overvaluation of stock price and the speed of the mean reversion are exhibited per date in the G7 countries, showing that the dynamics of stock price adjustment is highly dependent on the date and on the country under consideration.

Keywords: Price; heterogeneous transaction costs; STECMs (search for similar items in EconPapers)
Date: 2009
Note: View the original document on HAL open archive server: https://hal.science/hal-04140874
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://hal.science/hal-04140874/document (application/pdf)

Related works:
Working Paper: Nonlinear Stock Price Adjustment in the G7 Countries (2009)
Working Paper: Nonlinear stock prices adjustment in the G7 countries (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-04140874

Access Statistics for this paper

More papers in Working Papers from HAL
Bibliographic data for series maintained by CCSD (hal@ccsd.cnrs.fr).