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Learning and Rationality: an Empirical Study of Investment Managers' Stock Market Predictions

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  • Mark P. Taylor

Abstract

The rationality of investment managers' expectations with respect to changes in the London FTA All Share stock market index is examined using survey data. Respondents to the survey include chief investment managers from over fifty leading investment houses in the City of London. By modelling the actual current and expected future changes as a jointly covariance stationary process, the time series properties of the data are exploited to yield an efficient test of the rational expectations hypothesis as a set of non-linear restrictions on the vector autoregressive representation. Rationality for the full sample period August 1980 to July 1985 is rejected. However, tests carried out for a smaller sample period starting in July 1981, which arguably allows agents enough time to have adapted to the new monetary measures instigated by the first Thatcher government, are unable to reject rationality.

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  • Mark P. Taylor, 1987. "Learning and Rationality: an Empirical Study of Investment Managers' Stock Market Predictions," Annals of Economics and Statistics, GENES, issue 8, pages 43-57.
    • Handle: RePEc:adr:anecst:y:1987:i:8:p:43-57
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