Journal
JOURNAL OF BUSINESS & ECONOMIC STATISTICS
Volume 19, Issue 3, Pages 299-314Publisher
AMER STATISTICAL ASSOC
DOI: 10.1198/073500101681019954
Keywords
asset pricing; Bayesian learning; Markov switching; volatility
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This article presents empirical evidence on the existence of structural breaks in the fundamentals process underlying U.S. stock prices. I develop an asset-pricing model that represents breaks in the context of a Markov switching process with an expanding set of nonrecurring 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 serial correlation in stock returns after a break.
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