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One Simple Test of Samuelson's Dictum for the Stock Market

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Abstract

Samuelson [1998] offered the dictum that the stock market is "micro efficient" but "macro inefficient." That is, the efficient markets hypothesis works much better for individual stocks than it does for the aggregate stock market. In this paper, we present one simple test, based both on regressions and on a simple scatter diagram that vividly illustrates that there is some truth to Samuelson's dictum. The data comprise all U.S. firms on the CRSP tape that have survived since 1926.

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File URL: http://cowles.econ.yale.edu/P/cd/d13b/d1386.pdf
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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1386.

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Length: 18 pages
Date of creation: 01 Oct 2002
Date of revision:
Publication status: Published in Economic Inquiry (2005), 43(2): 221-228
Handle: RePEc:cwl:cwldpp:1386

Note: CFP 1183.
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

Related research

Keywords: Market efficiency; Random walk; Dividend yield; Dividend price ratio; Present value; Excess volatility; Gordon model;

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References

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  1. Robert J. Shiller & John Y. Campbell, 1986. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Cowles Foundation Discussion Papers 812, Cowles Foundation for Research in Economics, Yale University.
  2. Campbell, John Y & Shiller, Robert J, 1988. " Stock Prices, Earnings, and Expected Dividends," Journal of Finance, American Finance Association, vol. 43(3), pages 661-76, July.
  3. John Y. Campbell, 1991. "A Variance Decomposition for Stock Returns," NBER Working Papers 3246, National Bureau of Economic Research, Inc.
  4. James M. Poterba & Lawrence H. Summers, 1989. "Mean Reversion in Stock Prices: Evidence and Implications," NBER Working Papers 2343, National Bureau of Economic Research, Inc.
  5. Robert J. Shiller, 1980. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," NBER Working Papers 0456, National Bureau of Economic Research, Inc.
  6. Randolph B. Cohen & Christopher Polk & Tuomo Vuolteenaho, 2001. "The Value Spread," NBER Working Papers 8242, National Bureau of Economic Research, Inc.
  7. Graham Elliott & James H. Stock, 1992. "Inference in Time Series Regression When the Order of Integration of a Regressor is Unknown," NBER Technical Working Papers 0122, National Bureau of Economic Research, Inc.
  8. Paul A. Samuelson, 1998. "Summing up on business cycles: opening address," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 42(Jun), pages 33-36.
  9. Jeffrey C. Fuhrer & Scott Schuh, 1998. "Beyond shocks: what causes business cycles?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 42(Jun).
  10. LeRoy, Stephen F & Porter, Richard D, 1981. "The Present-Value Relation: Tests Based on Implied Variance Bounds," Econometrica, Econometric Society, vol. 49(3), pages 555-74, May.
  11. repec:cup:etheor:v:10:y:1994:i:3-4:p:672-700 is not listed on IDEAS
  12. John Y. Campbell & Motohiro Yogo, 2002. "Efficient Tests of Stock Return Predictability," Harvard Institute of Economic Research Working Papers 1972, Harvard - Institute of Economic Research.
  13. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-53, October.
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Cited by:
  1. Robert J. Shiller, 2003. "From Efficient Markets Theory to Behavioral Finance," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 83-104, Winter.
  2. Nick Bloom, 2006. "The impact of uncertainty shocks: firm level estimation and a 9/11 simulation," LSE Research Online Documents on Economics 19867, London School of Economics and Political Science, LSE Library.

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