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|Title:||Rational Expectations, Supply Effect, and Stock Price Adjustment Process: A Simultaneous Equations System Approach|
|Author(s):||Gweon, Seong C.|
|Department / Program:||Finance|
|Degree Granting Institution:||University of Illinois at Urbana-Champaign|
|Abstract:||The capital asset pricing model of Sharpe (1964), Lintner (1965), and Mossin (1966) is a single-period equilibrium analysis in which the behavior of security demand, conditional upon a postulated probability distribution of returns, is examined. Thus the model is too restrictive in its omission of multiperiod price behavior, its assumption of exogenously given expected returns, and its neglect of the supply side.
The purpose of the thesis is to derive the stochastic nature of security prices in a multiperiod context, allowing returns to be endogenous within the model. The supply side is introduced to the SLM model to develop a market equilibrium relationship in which expectation error of a security price due to unexpected random shock is related to the adjustments of prices and dividends of all other securities. This model thus resembles Cheng and Grauer's (1980) three-security model, but generalizes it since the new model clearly shows that two arbitrarily chosen security prices cannot fully explain a third security price.
Two hypotheses are tested based on the coefficient structure of the reduced-form equations of the model. First, to test the explanatory power of off-diagonal elements in each equation, each portfolio's price is regressed on its own dividend and all other dividends. Second, to test the equality of diagonal coefficients across the equations, two procedures are employed: regression with dummy variables and the seemingly unrelated regressions method. It is concluded that evidence is sufficient, if not complete, to support the existence of the supply effect.
Thesis (Ph.D.)--University of Illinois at Urbana-Champaign, 1985.
|Date Available in IDEALS:||2014-12-16|