Finance Discipline Group
UTS Business School
University of Technology, Sydney

Working Paper Series

Title:
Modelling the Value of the S&P 500 - A System Dynamics Perspective
Author(s): Carl Chiarella & S. Gao
Date of publication: April 2002
Working paper number: 115
Abstract:
This paper seeks to model the adjustment process in the stock market by a continuous time state space model focusing on input-out relations. The value of the S&P 500 is generated as the output of the model with earnings and the interest rate as input. The model is found to fit the data well, and indicates that the stock price dynamics can be considered as a price-following-value process. The value determines the time varying trend of price, and random buy-sell pressure drives price fluctuations about value. The 1987 stock price bubble shows up clearly as a gap between price and value.
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Known citations:

Chiarella, C. and Gao, S., 2002, "Solving the Price-Earnings Puzzle", Working Paper Number: 116, Finance Discipline Group, University of Technology, Sydney.

Chiarella, C. and Gao, S., 2004, "Continuous Time Model Estimation", Working Paper Number: 138, Finance Discipline Group, University of Technology, Sydney.

Kan, N., 2005, Generalized Multinomial CRR Option PricingMmodel and its Black-Scholes Type Limit, Thesis, University of Gottingen

Rengasamy, E., 2012, "An Analysis of the Causal Linkage Among Different Variables That Contribute to Systemic Crisis: A Systems Thinking Approach", Journal of Business and Policy Research, 7(4), 73-88.

Shamsuddin, A. F. M. and Hillier, J. R., 2004, "Fundamental Determinants of the Australian Price–Earnings Multiple", Pacific-Basin Finance Journal, 12(5), 565-576.

Xiaolian, Z., 2012, Stock Market Modelling: A System Adaptation Approach, PhD Thesis, National University of Singapore.

Zheng, X. and Chen, B. M., 2012, "Modeling and Forecasting of Stock Markets Under a System Adaptation Framework", Journal of Systems Science and Complexity, 25(4), 641-674.