The Behaviour of UK Stock Prices and Returns: Is the Market Efficient?

23 Pages Posted: 28 Jan 2012

See all articles by Keith Cuthbertson

Keith Cuthbertson

City University London - Sir John Cass Business School

Simon Hayes

Bank of England

Dirk Nitzsche

City University London - Sir John Cass Business School

Date Written: July 1997

Abstract

The VAR methodology of Campbell and Shiller (1989) is employed under four different assumptions regarding equilibrium expected returns to assess the efficiency of the UK stock market. In our first model, equilibrium expected (real) returns are assumed to be constant, while in the second model, excess returns are assumed to be constant. The next two models assume that equilibrium returns depend upon a time‐varying risk premium which varies with the conditional expectation of the return variance (i.e. the CAPM). Our results yield evidence of short‐termism, even when the key assumption of a time‐invariant discount rate is relaxed.

Suggested Citation

Cuthbertson, Keith and Hayes, Simon and Nitzsche, Dirk, The Behaviour of UK Stock Prices and Returns: Is the Market Efficient? (July 1997). The Economic Journal, Vol. 107, Issue 443, pp. 986-1008, 1997. Available at SSRN: https://ssrn.com/abstract=1994198 or http://dx.doi.org/10.1111/j.1468-0297.1997.tb00003.x

Keith Cuthbertson (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Simon Hayes

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Dirk Nitzsche

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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