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Stability of technology stock prices: evidence of rational expectations or irrational sentiment?

Kathryn Wilkens (Worcester Polytechnic Institute, 100 Insititute Road, Worcester, MA 01609)
Nordia D. Thomas (Worcester Polytechnic Institute, 100 Insititute Road, Worcester, MA 01609)
M.S. Fofana (Worcester Polytechnic Institute, 100 Insititute Road, Worcester, MA 01609)

Managerial Finance

ISSN: 0307-4358

Article publication date: 1 December 2004

Abstract

We examine the stability of market prices for 35 technology and 35 industrial stocks for the period December 31, 1993 to October 31, 2002. A phase portrait plot of the detrended log prices and de‐meaned returns of the two sectors shows a chaotic pattern in the stock prices indicating the presence of nonlinearity. However, when we compute the Lyapunov exponents, negative values are obtained. This shows that the price fluctuations for the 70 stocks result primarily from diffusion processes rather than from nonlinear dynamics. We evaluate forecast errors from a naïve model, a neural network, and ARMA models and find that the forecast errors are correlated with average changes in closed‐end fund discounts and other sentiment indexes. These results support an investor sentiment explanation for the closed‐end fund puzzle and behavioral theories of investor overreaction.

Keywords

Citation

Wilkens, K., Thomas, N.D. and Fofana, M.S. (2004), "Stability of technology stock prices: evidence of rational expectations or irrational sentiment?", Managerial Finance, Vol. 30 No. 12, pp. 33-54. https://doi.org/10.1108/03074350410769380

Publisher

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Emerald Group Publishing Limited

Copyright © 2004, Emerald Group Publishing Limited