English, Article, Journal or magazine article edition: Structural Breaks, Incomplete Information and Stock Prices Allan Timmermann

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Bookmark: http://trove.nla.gov.au/version/45254
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Structural Breaks, Incomplete Information and Stock Prices
Author
  • Allan Timmermann
Physical Description
  • preprint
Notes
  • This paper presents new empirical evidence on the existence of structural breaks in the fundamentals process underlying US stock prices and develops an asset pricing model which considers the possibility of such breaks. Three break points are identified: The Great Depression, World War II, and the oil price shocks around 1974. Different hypotheses for how investors form expectations about future dividends after a break are proposed and analysed. A model in which investors do not have full information about the parameters of the dividend process but gradually update their beliefs as new information arrives is shown to induce volatility clustering and serially correlated stock returns after a break. These patterns are confirmed to exist in US stock returns around the time of the breakpoints.
  • RePEc:fmg:fmgdps:dp311
  • This paper presents empirical evidence on the existence of structural breaks in the fundamentals process underlying US stock prices. We develop an asset pricing model that represents breaks in the context of a Markov switching process with an expanding set of non-recurring states. Different hypotheses on how investors form expectations about future dividends after a break are proposed and analyzed. A model in which investors do not have full information about the parameters of the dividend process but gradually update their beliefs as new information arrives is shown to induce skewness, kurtosis, volatility clustering and the serial correlation in stock returns after a break.
  • RePEc:cdl:ucsdec:2001-02
Language
  • English
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