OEKONOMETRISCHES FORSCHUNGSSEMINAR (M. Deistler, R. Alt, R. Kunst)

Donnerstag, 23. Mai 1996

The Dynamics of Stock Prices and Volume in a Model of Nontradable Asset

Chiente HSU (University of Bern)

Abstract: In this paper we develop a simple, fully dynamic asset pricing model in which agents have rational expectations and are heterogeneous in their investment opportunities. In this model, trading takes place because of changes in the excess return of the nontradable asset. We show that the equilibrium price and volume depend on the dividends of the stock as well as the excess return on the nontradable asset which are assumed to follow ARCH (GARCH) processes. The dynamics of stock prices and trading volume implied by the structural model can explain the following empirical regularities found in the high frequency stock data: (i) positive relation between volume and the magnitude of price changes; (ii) positive relation between volume and stock price volatility and (iii) positive autocorrelation of volume data. By employing the Efficient Method of Moment estimator developed by Gallant and Tauchen to the Dow Jones index and total NYSE trading volume we investigate to what extent the structural model can account for the observed joint dynamics of return and trading volume in the stock markets. The structural model implies a distribution of stock prices which is much closer than that observed in the data. The model can account for the VAR and ARCH features of the data. In addition, the estimation results coincide with findings of many previous empirical studies in the relations between stock prices and volume.

Ort: HS II Zeit: 9.00 Uhr c. t. =========================================================================