A new approach to stock price modelling and the efficiency of the Italian stock exchange

Abstract

Stock price dynamics, price barriers, market efficiency,

Fundamentals and asset price dynamics

“…On the whole, the estimation of the FTP model provides preliminary evidence for the hypothesis that the Italian stock market is characterized by switching regime dynamics where strong price growths usually follow long stable periods (Gardini et al, 1999). We can now go further by studying to what extent regime switches in stock returns can be explained by movements of the market fundamentals.…”

“…In a recent paper, Gardini et al (1999) suggest that the dynamics of asset prices can be well described by models which take account of the presence of different regimes. More specifically, they suggest that there are (i) regimes where asset prices tend to move within a 'target zone' and (ii) regimes where asset prices move from a target zone to a new one.…”

“…Actually, even simple descriptive analyses of (Italian) stock price dynamics show that in a number of cases two distinct regimes can be found: on the one hand, periods characterized by low price volatility can be observed; on the other hand, such low volatility periods alternate with periods characterized by outstanding movements of stock prices (Gardini et al 1999). In the upper panel of Fig.…”

“…First, we introduce and test the hypothesis that asset price dynamics are subject to regime switches (Gallo and Pacini, 1998;Gardini et al, A previous draft of the paper was presented at the XL Scientific Meeting of The Italian Statistical Society, Firenze, April 2000. We would like to thank Maurizio Vichi (the editor) and several anonymous referees for important suggestions.…”

“…Note that, if fundamentals modify agents' expectations, then a non-linear relation occurs between prices and fundamentals. Gardini et al (1999) provide a formal way of modeling such market behavior.…”