Threshold stock price adjustment

In this chapter the author studies the capital market efficiency hypothesis and checks whether the stock price adjustment dynamics is instantaneous, continuous, and linear or not. In particular, the author proposes to analyze the stock price evolution while taking into account the presence of transaction costs, the coexistence of heterogeneous investors, and the interdependence between stock markets. On the one hand, he provides strong evidence to suggest that the efficiency hypothesis is rejected. On the other hand, he proves that the stock index adjustment is rather discontinuous, asymmetrical, and nonlinear. Using threshold cointegration techniques, he proposes a new nonlinear modeling to reproduce the CAC40 adjustment dynamics that not only replicates the French market adjustment dynamics in the presence of market frictions but also captures the interdependence between the French and American stock markets, highlighting the reaction of French shareholders in relation to the changes in the behaviour of American speculators.