Browsing by Subject "LMARX Model"

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  • Kaliva, Kasimir; Koskinen, Lasse (2006)
    Insurance Supervisory Authority. Research reports 2
    This paper proposes an autoregressive regime-switching model of stock price dynamics in which the process creates pricing bubbles in one regime while error-correction prevails in the other. In the bubble regime the stock price depends negatively on inflation. In the error-correction regime it depends on the price-dividend -ratio. We find that the probability of regime-switch depends on exogenous inflation and lagged price. The model is consistent with Shleifer and Vishny’s theoretical noise trader and arbitrageur model and Modigliani’s inflation illusion phenomenon. The results emphasize the importance of inflation and the price-dividend -ratio when assessing investment risk.
  • Kaliva, Kasimir; Koskinen, Lasse (2008)
    In this paper we quantify the risk caused by the crash of a pricing bubble in the US stock market by utilizing a recently introduced econometric bubble model. The skewness and kurtosis are shown to vary widely with the price-dividend ratio. Simulation experiments quantify how the moments and VaR of the predictive distribution depend on the holding period, the price-dividend ratio and inflation. This information is useful in deciding on market timing and needed risk capital. In addition the analysis of higher moments support the old wisdom that stocks are a more attractive investment in the long run than in the short run.