Working Paper: NBER ID: w0994
Authors: Lawrence H. Summers
Abstract: This paper examines the power of statistical tests commonly used to examine the efficiency of speculative markets. It shows that for markets with "long horizons" such as the stock markets, or the market for long term bonds, 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 also suggests that speculation is unlikely to insure rational valuations, since similar problems of identification plague both financial economists and would-be speculators.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| low test power (L94) | inability to detect market inefficiencies (G14) |
| persistent market mispricing (G19) | no observable patterns in returns (G19) |
| speculative behavior (D84) | persistence of valuation errors (G41) |
| identification challenges (F55) | hinder speculators (D84) |
| tests for market efficiency (G14) | no robust evidence against significant valuation errors (G41) |