Working Paper: CEPR ID: DP5614
Authors: David Meenagh; Patrick Minford; David Peel
Abstract: A model of profits switches between four regimes with fixed probabilities; the rationally expected profits stream implies the stock market value. This efficient market model is not rejected by UK post-war time-series behaviour of either profits or the FTSE index.
Keywords: efficient markets; rational expectations; regime switching; stock returns
JEL Codes: C15; C5; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| regime switching model (C22) | profits series (D33) |
| profits series (D33) | FTSE index (G12) |
| regime switching model (C22) | FTSE index (G12) |
| rational expectation of future profits (D84) | present discounted value (H43) |
| present discounted value (H43) | implied stock market series (FTSE) (G12) |
| model's ability to generate series consistent with actual profits and FTSE data (C51) | supports hypothesis of market efficiency (G14) |
| extreme events (crashes) (G01) | stock market behavior (G41) |