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Tirole (1985)
Asset Bubbles and Overlapping GenerationsEconometrica, 53
DISCUSSION ROBERT F. STAMBAUGH*: This interesting paper by Professor Summers questions the power of common tests of market efficiency. The inefficiency entertained is one in which the deviation of the price from the rational market fundamental is persistent and potentially large. This deviation is similar to a speculative bubble, which can induce "excess" volatility and negative autocorrelation in returns (e.g., Tirole [1]). The major contribution of this paper lies in the observation that, while the pricing error can contribute substantially to the variance of returns, the negative autocorrrelation can be too small to detect using common techniques. Thus, Professor Summers argues that most tests of market efficiency have had little power to reject market efficiency against this alternative version of inefficiency. Researchers often face the reality that a statistical test has power to reject the null against only certain classes of alternatives-a uniformly powerful test is the * University of Chicago. The Journal of Finance exception rather than the rule. For example, one can test the stationarity of a time series, but a specific test is not powerful against all forms of nonstationarity. Many previous tests of efficiency have been concerned with detecting cases where prices are slow
The Journal of Finance – Wiley
Published: Jul 1, 1986
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