A mathematical statistical pricing model for emerging stock markets
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Soumitra K. Mallick is an Assistant Professor (Reader) at the Indian Institute of Social Welfare & Business Management and works in the areas of Indian Finance, Dynamic Analysis and Asset Markets. He holds a BCom from Calcutta University, a CA from the Institute of Chartered Accountants of India and a PhD from New York University.
Amitava Sarkar is a Professor at the West Bengal University of Technology and works in the areas of Indian Finance and Planning. He holds an MA in Economics from Calcutta University and a PhD from University of Pittsburgh.
Kalyan K. Roy is a Professor of Financial Management at the Indian Institute of Social Welfare & Business Management and the Department of Business Management, Calcutta University. He holds a BE from Calcutta University and a PhD from University of South Carolina.
Anjan Chakraborty is Reader in the Department of Economics, Calcutta University and works in the areas of Political Economy and Financial Economics. He holds an MA in Economics from Calcutta University and a PhD from University of Southern California.
Tamal Duttachaudhuri is a General Manager with Industrial Investment Bank of India and works in the areas of Indian Finance and Policy and Econometrics. He holds an MA in Economics from Calcutta University and a PhD from Indiana University. Indian Institute of Social Welfare & Business Management, Management House, College Square West, Kolkata 700 073, India. Tel: 91-33-2241 22418694, Fax: 91-33-22413975; E-mail: [email protected]
Abstract This paper carries out a dynamic analysis of stock pricing in emerging economies, using a cointegration model on panel data, using ‘nested’ procedures with subsets of company groupings and time periods — taking Indian stock markets as the concrete case. It is observed that all classifications of company groupings do not result in similar observations. This helps in developing an approach to panel data estimation for financial markets without using structural equations. At the same time it develops a dynamic asset pricing model for emerging economies using India as a concrete case with net worth, profit, dividend, debt–equity ratio, interest cost and their growths as control variables. Journal of Asset Management (2007) 7, 335–346. doi:10.1057/palgrave.jam.2250041 Keywords: dynamic stock pricing, panel data model, cointegration, industry properties, Indian capital asset pricing
Introduction Efficient stock market operations require that stock prices reflect all available information in the market. Fundamentals are the source of all information within the market. Thus,
it has been proved that under Rational Expectations Equilibrium prices are efficient as they reflect all information, as they are continuous variables of the fundamentals. Hence, such prices are efficient. Assuming
& 2007 Palgrave Macmillan Ltd, 1470-8272 $30.00 Vol. 7, 5, 335–346 Journal of Asset Management www.palgrave-journals.com/jam
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that in emerging markets it takes one year for stock markets to reach Rational Expectations E
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