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Fundamentals and asset price dynamics

Author

Listed:
  • Attilio Gardini

    (University of Bologna)

  • Giuseppe Cavaliere

    (University of Bologna)

  • Michele Costa

    (University of Bologna)

Abstract

. The relation between fundamentals and asset returns is analyzed by means of Markov-switching regression models with time-varying transition probabilities. By referring to the Italian Stock Exchange over the 1973-2002 period, we find that (i) returns ‘switch’ between a zero-expected return/low volatility state and a high expected return/high volatility state; (ii) states are persistent and hence state changes can be forecast to some extent; (iii) the probability of state changes can be explained in terms of changes in the fundamentals; (iv) fundamentals do not have a direct impact on the expected returns but they only affect the transition probability matrix. Overall, our results show that a non-linear relation between market price changes and market fundamentals can be caught within the framework of (Markov) switching regession models.

Suggested Citation

  • Attilio Gardini & Giuseppe Cavaliere & Michele Costa, 2003. "Fundamentals and asset price dynamics," Statistical Methods & Applications, Springer;Società Italiana di Statistica, vol. 12(2), pages 211-226, December.
    • Handle: RePEc:spr:stmapp:v:12:y:2003:i:2:d:10.1007_s10260-003-0053-3
    DOI: 10.1007/s10260-003-0053-3
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