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Modern Approaches to Asset Price Formation: A Survey of Recent Theoretical Literature

  • Tro Kortian

    (Reserve Bank of Australia)

In recent years, there has been much re-assessment and re-evaluation by academic economists of the Efficient Markets Hypothesis. The traditional view, stressing the ability of speculative markets to keep asset prices in line with economic fundamentals, has been challenged by an approach more sympathetic to the role of self-fulfilling expectations, psychology, herd behaviour and other seemingly irrational influences on asset prices. Greater appreciation of the institutional features of real-world asset markets also distinguishes this modern approach. The paper summarises this influential and rapidly-growing body of theoretical literature on asset price formation.

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Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp9501.

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Date of creation: Mar 1995
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Handle: RePEc:rba:rbardp:rdp9501
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  1. Diba, Behzad T & Grossman, Herschel I, 1988. "The Theory of Rational Bubbles in Stock Prices," Economic Journal, Royal Economic Society, vol. 98(392), pages 746-54, September.
  2. Fama, Eugene F & French, Kenneth R, 1988. "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 246-73, April.
  3. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, . "Noise Trader Risk in Financial Markets," J. Bradford De Long's Working Papers _124, University of California at Berkeley, Economics Department.
  4. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann,, . "The Survival of Noise Traders in Financial Markets," J. Bradford De Long's Working Papers _123, University of California at Berkeley, Economics Department.
  5. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 797-817.
  6. Jeremy Bulow & Paul Klemperer, 1991. "Rational Frenzies and Crashes," NBER Technical Working Papers 0112, National Bureau of Economic Research, Inc.
  7. Franklin Allen & Gary Gorton, 1991. "Rational Finite Bubbles," NBER Working Papers 3707, National Bureau of Economic Research, Inc.
  8. De Bondt, Werner F M & Thaler, Richard, 1985. " Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
  9. Abhijit V. Banerjee, 1993. "The Economics of Rumours," Review of Economic Studies, Oxford University Press, vol. 60(2), pages 309-327.
  10. Culter, D.M. & Poterba, J.M. & Summers, L.H., 1990. "Speculative Dynamics," Working papers 544, Massachusetts Institute of Technology (MIT), Department of Economics.
  11. Fischer Black, 1988. "An Equilibrium Model of the Crash," NBER Chapters, in: NBER Macroeconomics Annual 1988, Volume 3, pages 269-276 National Bureau of Economic Research, Inc.
  12. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 2010. "A theory of Fads, Fashion, Custom and cultural change as informational Cascades," Levine's Working Paper Archive 1193, David K. Levine.
  13. Campbell, J.Y. & Kyle, A.S., 1988. "Smart Money, Noise Trading And Stock Price Behavior," Papers 95, Princeton, Department of Economics - Financial Research Center.
  14. Franklin Allen & Gary Gorton, 1993. "Churning Bubbles," Review of Economic Studies, Oxford University Press, vol. 60(4), pages 813-836.
  15. David M. Cutler & James M. Poterba & Lawrence H. Summers, 1990. "Speculative Dynamics and the Role of Feedback Traders," NBER Working Papers 3243, National Bureau of Economic Research, Inc.
  16. Cochrane, John H., 1991. "Volatility tests and efficient markets : A review essay," Journal of Monetary Economics, Elsevier, vol. 27(3), pages 463-485, June.
  17. Allen, Helen & Taylor, Mark P, 1990. "Charts, Noise and Fundamentals in the London Foreign Exchange Market," Economic Journal, Royal Economic Society, vol. 100(400), pages 49-59, Supplemen.
  18. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1989. "Positive Feedback Investment Strategies and Destabilizing Rational Speculation," NBER Working Papers 2880, National Bureau of Economic Research, Inc.
  19. Blanchard, Olivier Jean, 1979. "Speculative bubbles, crashes and rational expectations," Economics Letters, Elsevier, vol. 3(4), pages 387-389.
  20. Gary Gorton & James Dow, 1991. "Trading, Communication and the Response of Price to New Information," NBER Working Papers 3687, National Bureau of Economic Research, Inc.
  21. Caplin, Andrew & Leahy, John, 1994. "Business as Usual, Market Crashes, and Wisdom after the Fact," American Economic Review, American Economic Association, vol. 84(3), pages 548-65, June.
  22. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, June.
  23. Behzad T. Diba & Herschel I. Grossman, 1987. "On the Inception of Rational Bubbles," The Quarterly Journal of Economics, Oxford University Press, vol. 102(3), pages 697-700.
  24. De Bondt, Werner F M & Thaler, Richard H, 1987. " Further Evidence on Investor Overreaction and Stock Market Seasonalit y," Journal of Finance, American Finance Association, vol. 42(3), pages 557-81, July.
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