Heterogeneity in Stock Pricing: A STAR Model with Multivariate Transition Functions

Matthijs Lof

MPRA Paper from University Library of Munich, Germany

Abstract: Stock prices often diverge from measures of fundamental value, which simple present value models fail to explain. This paper tries to find causes for these long-run price movements and their persistence by estimating a STAR model for the price-earnings ratio of the S&P500 index for 1961Q1 - 2009Q3, with a transition function that depends on a wider set of exogenous or predetermined transition variables. Several economic, monetary and financial variables, as well as linear combinations of these, are found to have nonlinear effects on stock prices. A two-step estimation procedure is proposed to select the transition variables and estimate their weights. This STAR model can be interpreted as a heterogeneous agent asset pricing model that makes a distinction between chartists and fundamentalists, where the set of transition variables is included in the agents’ information set.

Keywords: Heterogeneous agents; Regime switching; Stock prices; STAR models (search for similar items in EconPapers)
JEL-codes: C22 E44 G12 (search for similar items in EconPapers)
Date: 2010-07-01
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https://mpra.ub.uni-muenchen.de/30520/1/MPRA_paper_30520.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/33709/2/MPRA_paper_33709.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/38571/2/MPRA_paper_38571.pdf revised version (application/pdf)

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