Modelling the Value of the S&P 500 - A System Dynamics Perspective

Carl Chiarella and Shenhuai Gao ()
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Shenhuai Gao: Discipline of Economics, University of Sydney

No 115, Working Paper Series from Finance Discipline Group, UTS Business School, University of Technology, Sydney

Abstract: This paper seeks to model the adjustment process in the stock market by a continuous time state space model focusing on input-out relations. The value of the S&P 500 is generated as the output of the model with earnings and the interest rate as input. The model is found to fit the data well, and indicates that the stock price dynamics can be considered as a price-following-value process. The value determines the time varying trend of price, and random buy-sell pressure drives price fluctuations about value. The 1987 stock price bubble shows up clearly as a gap between price and value.

Keywords: stock price; intrinsic value; stock price bubble; adjustment process (search for similar items in EconPapers)
JEL-codes: C22 C51 G12 (search for similar items in EconPapers)
Date: 2002-04-01
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Citations: View citations in EconPapers (3)

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