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Does the Stock Market Rationally Reflect Fundamental Values?

Does the Stock Market Rationally Reflect Fundamental Values? ABSTRACT This paper examines the power of statistical tests commonly used to evaluate the efficiency of speculative markets. It shows that these tests have very low power. Market valuations can differ substantially and persistently from the rational expectation of the present value of cash flows without leaving statistically discernible traces in the pattern of ex‐post returns. This observation implies that speculation is unlikely to ensure rational valuations, since similar problems of identification plague both financial economists and would be speculators. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

Does the Stock Market Rationally Reflect Fundamental Values?

The Journal of Finance , Volume 41 (3) – Jul 1, 1986

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References (21)

Publisher
Wiley
Copyright
1986 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/j.1540-6261.1986.tb04519.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT This paper examines the power of statistical tests commonly used to evaluate the efficiency of speculative markets. It shows that these tests have very low power. Market valuations can differ substantially and persistently from the rational expectation of the present value of cash flows without leaving statistically discernible traces in the pattern of ex‐post returns. This observation implies that speculation is unlikely to ensure rational valuations, since similar problems of identification plague both financial economists and would be speculators.

Journal

The Journal of FinanceWiley

Published: Jul 1, 1986

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