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The Rationality and Efficiency of Stock Price Relative to Money Announcement Information

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  • Foote, William G

Abstract

Recent studies find that stock price reacts only to unanticipated changes in the money supply. These studies assume a joint hypothesis of rationality and efficiency in their tests. This paper formulates a model in which stock price depends both upon anticipated and unanticipated money supply forecasts. From this model, an econometric model that separates the hypothesis of rationality and efficiency is estimated. The results show that investors rationally incorporate forecasts of the weekly current money announcement into stock price during the pre-October 6, 1979, sample period. However, efficiency with respect to money information cannot be corroborated in this period. Cross-equation restrictions implied by rationality are rejected during the post-October 6, 1979, period. In this period, efficiency again cannot be corroborated. Alternative money prediction specifications indicate the robustness of these results. Copyright 1989 by MIT Press.

Suggested Citation

  • Foote, William G, 1989. "The Rationality and Efficiency of Stock Price Relative to Money Announcement Information," The Financial Review, Eastern Finance Association, vol. 24(2), pages 281-298, May.
    • Handle: RePEc:bla:finrev:v:24:y:1989:i:2:p:281-98
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