Stock Market Bubbles , Inflation and Investment Risk

  title={Stock Market Bubbles , Inflation and Investment Risk},
  author={Kasimir Kaliva and Lasse Koskinen}
This paper proposes an autoregressive regime-switching model of stock price dynamics in which the process creates pricing bubbles in one regime while error-correction prevails in the other. In the bubble regime the stock price depends negatively on inflation. In the error-correction regime it depends on the price-dividend-ratio. We find that the probability of regime-switch depends on exogenous inflation and lagged price. The model is consistent with Shleifer and Vishny's theoretical noise… CONTINUE READING