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ENDOGENOUS JUMPING AND ASSET PRICE DYNAMICS

Published online by Cambridge University Press:  01 June 1998

G. C. Lim ,
Vance L. Martin  and
Leslie E. Teo
G. C. Lim
Affiliation:
University of Melbourne
Vance L. Martin
Affiliation:
University of Melbourne
Leslie E. Teo
Affiliation:
University of Rochester and International Monetary Fund
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Abstract

A model of asset price dynamics is derived in which large jumps in stock prices are determined endogenously. An important property of the model is that it can lead to asset price distributions that are multimodal. The model can explain how relatively small changes in dividends can lead to relatively large changes in asset prices and it can be used to identify the time period in which bubbles begin and end. The framework is applied to modeling the U.S. stock market crash in October 1987. Some forecasting experiments also are conducted with the result that the model is able to predict the size of the eventual crash in the aggregate stock price.

Keywords

Endogenous JumpingAsset Price Dynamics Stock Market Crash
Type
Research Article
Information
Macroeconomic Dynamics , Volume 2 , Issue 2 , June 1998 , pp. 213 - 237
Copyright
© 1998 Cambridge University Press

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