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Download the Paper (564 K, PDF file) - January 1, 2001 Tell a colleague about it. Printing Tips: Select 'print as image' in the Acrobat print dialog if you have trouble printing.

ABSTRACT:
This paper presents empirical evidence on the existence of structural breaks in the fundamentals process underlying US stock prices. We develop an asset pricing model that represents breaks in the context of a Markov switching process with an expanding set of non-recurring 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 the serial correlation in stock returns after a break.

SUGGESTED CITATION:
Allan Timmermann, "Structural Breaks, Incomplete Information and Stock Prices" (January 1, 2001). Department of Economics, UCSD. Paper 2001-02.
http://repositories.cdlib.org/ucsdecon/2001-02